Investment Highlights

• We maintain our HOLD recommendation on Maxis but with a lower DCF-derived fair value of RM5.76/share (from an earlier RM6.10/share) (based on a WACC discount rate of 7% and a terminal growth rate assumption of 2%), implying an FY18F EV/EBITDA of 11x, 1SD below its 3-year average of 12x.

• Maxis' lower DCF stems from a 5%-8% contraction in FY18FFY20F earnings due to the higher assumption rate for the group’s prepaid attrition by 10K/month from 5K/month, while we have accelerated the revenue decline in the group’s 3G radio access network arrangement with U Mobile in FY18F.

• Management is guiding for FY18F service revenue to decrease by a low single digit, which translates to a midsingle-digit EBITDA decline. This includes expectations for higher spectrum fees from the 2100MHz and 700MHz bands.

• As a comparison, rival Digi.Com is also guiding the same FY18F trajectory for its service revenue but expects a flat EBITDA margin.

• FY18F capex is expected to be flat at RM1bil, which should be around FY17 capex/service revenue of 12%. This excludes spectrum payments, such as for the 2100MHz’s RM118mil price component and the upcoming 700MHz fees.

• Maxis' FY17 normalised net profit of RM2,098mil came in within expectations, at 1% above our forecast and 3% above consensus. The group declared a final dividend of 5 sen, which brings FY17 DPS to 20 sen, as expected with a payout ratio of 68%.

• Sequentially, Maxis’ 4QFY17 normalised earnings slid 4% to RM538mil as revenue declined 3% on a prepaid attrition of 221K and 6% increase in depreciation, which was partly offset by a 2.5ppt lower effective tax rate of 21%.

• The group’s service revenue declined by 2% QoQ due to the 3% decline in prepaid subscribers and RM1/month contraction in prepaid average revenue per user (ARPU), partly offset by a 45K increase in postpaid users and RM1/month increase in postpaid ARPU to RM103/month.

• Since 2Q2015, Maxis’ overall subscriber base has fallen by 2mil, wholly from the prepaid segment with no end in sight yet for the haemorrhage. Nevertheless, migration to the postpaid segment has driven Maxis One subscription by 80K QoQ to 2.1mil in 4QFY17, underpinned by its best-of-class customer experience and service connectivity.

• For Maxis, its postpaid’s share of service revenue has progressively expanded, accounting for 54% in 4QFY17 vs 48% in FY15. Hence, the growth of this segment will have a larger relative impact on the group’s prospective earnings. As a comparison, Digi’s postpaid revenue accounted for 38% of 4QFY17 service revenue.

• The stock’s FY18F EV/EBITDA of 11x is almost at parity to its 3-year average, while dividend yields are decent at 3%.

Source: AmInvest Research - 8 Feb 2018