Investment Highlights

• We maintain our HOLD recommendation on Maxis with unchanged forecasts and 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.

• Based on the analyst briefing yesterday, these are the salient takeaways:

• We expect continued contraction in postpaid average revenue per user (ARPU), exacerbated by the recent Hotlink Postpaid Flex which offers free unlimited calls/SMS with 1GB data at RM30/month and an option to purchase additional 5GB data for RM25/month. In IQFY18, postpaid ARPU has fallen by RM4/month to RM92/month on lower packages for shared family lines. Continued attrition from legacy subscribers and migration from prepaid contributed to Maxis One customers, rising 71K QoQ to 2.1mil while its active postpaid base fell by 59K to 2.9mil. While management indicated that there will be term conditions to prevent the migration of existing postpaid customers to the new attractive Hotlink plans, we view that the underlying trend faces substantive headwinds as peers will be launching similar products. Celcom’s Xpax recently launched its own postpaid plan at RM50/month offering 15GB of data, unlimited iFlix access and unlimited voice to 5 Celcom lines.

• Management plans to arrest the declining prepaid base and improve its blended ARPU of RM51/month with the new Hotlink plans. However, we view a likelihood of an acceleration of prepaid migration to the new more affordable flexi plans due to their similar price points with the group’s prepaid ARPU of RM35/month currently. Hence, we maintain our prepaid attrition of 10K/month for FY18F, 8K/month for FY19F and 6K for FY20F. This leads to an unchanged FY18F service revenue decrease assumption of 4% in line with guidance of mid-single digit decline.

• 1QFY18 EBITDA margin was largely stable QoQ at 52% as the 3% decline in service revenue was offset by an 8% decline in operating costs, largely from lower negotiated IDD roaming charges and one-off write-back of IT cost provisions.

• Maxis’ adoption of MFRS 15, which impacts device subsidy and sales commission, was retroactively adjusted in FY17. Hence, while revenue showed a 10%-11% increase, the accounting treatment had a mild 1QFY18 negative earnings erosion compared to Digi.Com’s net profit increase of 10%, which reflected the current and past impact in the quarter.

• 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 - 20 Apr 2018