Investment Highlights

• We maintain our HOLD recommendation on Maxis but with a higher DCF-derived fair value of RM6.10/share (based on a discount rate of 7% which is equivalent to its WACC and a terminal growth rate assumption of 2%), implying an FY17F EV/EBITDA of 11x, 1SD below its 3-year average of 12x.

• Maxis' higher DCF stems from a 10%-11% increase in FY17F FY19F earnings due to a 2K monthly increase in postpaid subscriber assumptions together with a 10% reduction in traffic costs and 1ppt decline in effective tax rate.

• Maxis' 9MFY17 normalised net profit of RM1,560mil came in above expectations, accounting for 83% of our earlier FY17F earnings and 80% of consensus. As a comparison, the group's 9M results accounted for 71%-72% of FY15-FY16 normalised earnings.

• The stronger-than-expected results is partly due to the absence of any impact from the expected loss of data roaming revenues due to the termination of Maxis' 3G radio access network arrangement with U Mobile in stages over an 18-month period ending on 27 Dec 2018. Management now indicates that the impact will only be felt in FY18F.

• Meanwhile, the group's third interim dividend of 5 sen, which translates to a 15 sen for 9MFY17 (flat YoY), is within market expectations and management's payout policy of 75%.

• Sequentially, Maxis’ 3QFY17 normalised earnings rose 16% to RM562mil, due to a 1.6% increase in postpaid-driven service revenue and 5% reduction in costs, mainly from traffic and operation & maintenance expenses. This was further supported by a 3ppt QoQ decline in effective tax rate from higher reversal of deferred tax provisions.

• The group’s service revenue improvement stemmed from the postpaid division, which managed to increase its subscriber base by 7K in 3QFY17. While this has slowed down from 42K in 1QFY17- 2QFY17, management is confident of this segment’s robust trajectory.

• Nevertheless, Maxis’ overall subscriber base continued to decline with a 3QFY17 attrition of 392K, wholly from the prepaid segment. Since 2Q2015, Maxis’ prepaid subscriber base has fallen by 1.8mil or 18% with no end in sight yet for the haemorrhage.

• There was some cannibalisation as Maxis One postpaid subscription has risen by 57K QoQ to 1.9mil in 3QFY17 with postpaid average revenue per user remaining at RM102/month, sustained by its best-of-class customer experience and service connectivity.

• Management maintains its guidance for a FY17F flat service revenue and normalised EBITDA. With a flat capex guidance as well, we retain our capex assumption of 14% of service revenue, even though Maxis’ 9MFY17 capital expenditure of RM647mil (10% of service revenue) was lower by 13% YoY, on expectations of higher rollouts towards the year-end.

• The stock’s FY17F EV/EBITDA of 11x is almost at parity to its 3- year average, while dividend yields are decent at 3%.

Source: AmInvest Research - 26 Oct 2017