Investment Highlights

• We maintain our HOLD recommendation on Maxis with an unchanged DCF-derived fair value of RM5.76/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.

• Pending an analyst briefing later today, our forecasts are maintained as Maxis' 1QFY18 normalised net profit of RM510mil came in generally within expectations, 27% of our FY18F earnings and 26% of street’s. The group declared an interim dividend of 5 sen, as expected with a payout ratio of 75%.

• Unlike Digi.Com which recently registered a 10% increase in 1QFY18 net profit from the adoption of MFRS 15 on device subsidy and sales commissions, Maxis’ results appear to be adversely impacted, with 1QFY17 normalised net profit slightly adjusted down by 1% while revenue rose 10%. As a comparison, Maxis’ 4QFY17 revised core net profit was lower by 3% while revenue increased 11%.

• Post-MFRS 15 adoption, management is now guiding for FY18F service revenue to decrease by a mid-single digit decline vs. an earlier low single digit and for EBITDA to decline by a high single digit vs mid-single digit. This includes expectations for higher spectrum fees from the 2100MHz and 700MHz bands.

• FY18F capex guidance is maintained at a flat 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.

• Sequentially, Maxis’ 1QFY18 normalised earnings slid 2% to RM510mil as revenue fell 6% on a prepaid attrition of 278K, RM1/month decline in prepaid average revenue per user (ARPU) to RM35/month, RM4/month drop in postpaid ARPU to RM92/month and 3ppts increase in normalising effective tax rate to 25%.

• The group’s service revenue slipped by 3% QoQ due to the 4% decline in prepaid subscribers and contraction in ARPU, partly offset by a 64K increase in postpaid users.

• Since 2Q2015, Maxis’ overall subscriber base has fallen by 2.2mil, wholly from the prepaid segment with no end in sight yet for the haemorrhage due to SIM consolidation, migration to postpaid and intense competition.

• For Maxis, its postpaid’s share of service revenue is unchanged QoQ at 54% in 1QFY18, but up from 48% in 1QFY17. Hence, the growth of this segment continues to have a larger relative impact on the group’s prospective earnings. As a comparison, Digi’s postpaid revenue accounted for 40% of 1QFY18 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 - 19 Apr 2018