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.

• Our forecasts are maintained as Maxis' 1HFY18 normalised net profit of RM990mil (-1% YoY) came in generally within expectations, accounting for 51% of both our FY18F earnings and street’s. As a comparison, 1HFY15-1HFY17 represented 48%-50% of FY15-FY17 normalised earnings.

• The group declared an interim dividend of 6.1 sen, which brings 1HFY18 DPS to 12.8 sen (-11% YoY) and a 100% payout, above our FY18F assumption of 76% and 68%-75% in FY16-FY17.

• Maxis’ 1QFY18 normalised net profit decreased by 6% QoQ to RM480mil despite a flat revenue due to a 14% increase in depreciation on the doubling of capex to RM212mil on largely network capacity, 31% rise in marketing costs and 15% increase in operation and maintenance.

• As Maxis’ 1HFY18 service revenue fell by 4.9% while its EBITDA slid 1%, management maintains its cautious FY18F service revenue guidance of a mid-single digit decline (vs. our assumption of -4%) and high single-digit EBITDA decline (vs. our assumption of -4%).

• We expect a weaker 2HFY18 from a 2HFY18 decline in enterprise fixed services caused by the termination of the 3G network roaming arrangement with U Mobile together with higher depreciation charges.

• 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’ service revenue rose 1.7% from the 61K climb in postpaid subscribers to 3mil together with a RM2/month increase for both postpaid ARPU to RM94/month and prepaid ARPU to RM37/month. This was partly offset by the persistent prepaid subscriber fall of 40K to 7.7mil.

• All-in, Maxis registered an encouraging total subscriber gain of 21K, the first since 2QFY15 when the group’s base started to consistently contract which led to a loss of 2.5mil customers from SIM consolidation and intense competition.

• For Maxis, its postpaid’s share of service revenue is unchanged QoQ at 54% in 1HFY18, 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 41% of 1HFY18 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 4%.

Source: AmInvest Research - 19 Jul 2018