Maxis reported a 2Q18 core net profit of RM480m (flat yoy, -6% qoq), underpinned by strong postpaid and home fibre revenues but this was offset by prepaid weakness. EBITDA margin was also relatively stable at 50%. The sequentially weaker earnings were due to higher marketing and depreciation charges. Maintain HOLD with a lower target price of RM5.95, reflecting long-term terminal growth of 2% (from 2.5%) on a gradually diminishing network leadership. Entry price: RM5.10.

RESULTS

• Within expectations. Maxis reported a flattish 2Q18 core net profit of RM480m (-6% qoq) on the back post-paid service revenue growth and cost discipline. The prepaid market remains soft as a result of price-driven competition. Stepping into 2H18, Maxis will focus on enhancing digital capabilities, expanding coverage (to maintain network leadership) and grow enterprise business opportunities. Accounting for 49% of our full- year forecast, the results are within expectations. Maxis declared its second interim net DPS of 6.1 sen. We project a full-year 2018 net DPS of 20.6 sen (1H18: 11 sen).

STOCK IMPACT

• 2Q18 service revenue fell 3% yoy but grew 2% qoq to RM2,013m. Service revenue fell 3% yoy to RM2,013m in the quarter. This reflects a prepaid revenue decline of 13% yoy (flat qoq) due to aggressive price competition, SIM consolidation and migration from prepaid to postpaid packages. That said, Maxis was able to maintain prepaid ARPU at RM42/month by effectively using data analytics to increase mobile internet usage. Additionally, the company’s post-paid revenue rose 7% yoy and 2% qoq thanks to positive traction for the MaxisONE plan and increasing household account value via value accretive family offerings.
• EBITDA-to-service margin remained relatively stable at 50%, given cost optimisation efforts. Despite the revenue challenges, Maxis was able to maintain a 2Q18 EBITDA of RM1,007m with continuous cost optimisation efforts. Higher depreciation (+12% yoy; +11% qoq) however, led to sequentially lower earnings. All in all, 2Q18 core net profit came in flat yoy at RM480m (-6% qoq) with a stable EBITDA-to-service-revenue margin of 50%.
• Stabilising prepaid churn while defending ARPUs. Maxis lost an additional 39,000 prepaid subscribers in the quarter and we believe this was due to a continuously high rotational churn in the segment. That said, management remains confident their services and products can attract “high value” prepaid subscribers and importantly, maintain its high ARPU of RM42/share. Positively, Maxis was able to add 58,000 postpaid customers with a healthy postpaid ARPU of RM94/month (2Q17: RM96/month, 1Q18: RM92/month). Maxis continued to drive mobile internet user growth (2Q18: 8.2m) with high smartphone penetration (81% for prepaid).

EARNINGS REVISION/RISK

• No change to earnings forecasts. We project a 2018 core net profit of RM1,965m as we take into account the full impact of the termination of U-Mobile’s network sharing agreement (NSA) with Maxis over the next 10 months (termination done in stages, to be completed on 27 Dec 18). We estimate RM200m-250m annual revenue contribution from U-Mobile’s network sharing and alliance agreement (NSA). On the bright side, we expect Maxis to continue monetising data volume growth by leveraging its superior network coverage and handset subsidies.
• 2018: Driving value proposition. Maxis will stay focused on driving mobile internet proposition and target “value” customers to maintain its strong blended ARPU of RM58/month. Data usage continued to climb to 9.1GB/month in the quarter vs 5GB/month a year ago. Management is confident they can drive convergence by offering competitively priced home fibre packages (subscriber for home fibre grew 22% in 2Q18) and is well placed to support the government’s broadband initiatives. From the company’s perspective, industry dynamics ie competition, will shape future packages. New product propositions will be announced soon to capture fixed line opportunities.
• Risks include the entry of Digi and webe into the enterprise business segment, leading to Maxis losing market share in its dominant postpaid segment.

VALUATION/RECOMMENDATION

• Maintain HOLD with a lower DCF-based target price of RM5.95, factoring in a modest 2% terminal growth rate (previously 2.5%) as peers catch up on network and product offerings. Our call reflects lofty valuations and pedestrian earnings. At our target price, the stock trades at 23x 2019F PE and 11x EV/EBITDA. We think a good entry level is RM5.10.

Source: UOB Kay Hian Research - 19 Jul 2018