Maxis’ 1H18 core net profit of RM975m (-2% YoY) missed our estimate but was inline with consensus. Declared second dividend of 5.0 sen per share. Postpaid remained the bright spot and expect Maxis to benefit from MSAP. However, concerns on prepaid attrition and lower U Mobile’s DR contribution linger on. We reiterate HOLD with lower TP of RM5.68 after lowering our earnings estimates. Downside is limited by dividend yield of 3.6%.

Below expectation: 1H18 revenue of RM4.5bn translated into a disappointing core net profit of RM975m (post-MFRS 15), which only accounted for 46% of HLIB full year forecast, but matching consensus at 49%. Major deviations came from weaker-than expected margin and lower-than-expected D&A.

Dividend: Declared second interim tax exempt (single-tier) dividend of 5.0 sen per share (2Q17: 5.0), representing 82% payout. This will go ex on 28 Aug. YTD dividend amounted to 10.0 sen (1H17: 10.0) per share.

QoQ: While top line was flat, core service revenue was up 2% thanks to sustainable postpaid growth coupled with prepaid’s recovery. However, core net profit was lower by 3% due to higher marketing expenses (World Cup 2018) and higher D&A.

YoY: Declined 4% chiefly due to lacklustre prepaid performance which fell 13% which more than offset postpaid’s 7% gain. However, bottom line was flat thanks to impressive cost savings initiatives and lower interest expense.

YTD: Turnover declined 5% mainly due to deterioration in prepaid. Nevertheless, core earnings saw a more moderate contraction of 2% cushioned by lower D&A and interest expense.

Postpaid: Sub base continued to climb in 2Q18, topping 3m after adding 58k QoQ while ARPU strengthened by RM2 QoQ to RM94. Postpaid revenue breached the RM1bn mark after gaining 2% QoQ and 7% YoY. Innovative device and value accretive share line propositions stimulated positive tractions for converged plan, MaxisONE Prime as it continue to grow household account value/ ARPA through combination of mobile and fibre offerings. Besides, hybrid Hotlink Postpaid Flex saw encouraging results attracting entry-level postpaid sub and pre-to-post segment. Flex’s take up rate has exceeded early launch targets.

Prepaid: Blaming on price competition and pre-to-postpaid migration, Maxis lost 39k subs QoQ to a base of 6.7m but ARPU expanded RM1 QoQ to RM42. Prepaid internet continues to experience strong demand and accounted for 56% of prepaid revenue. Hotlink RED which provides free non-stop internet on leading 4G network has also attracted high value mobile internet users.

Forecast: After tweaking our forecasts based on latest data and deviations above, FY18-20 EPS are cut by 8%, 8% and 11%, respectively.

Reiterate HOLD with a lower DCF-derived TP of RM5.68 (from RM6.03), reflecting the downward earnings revision. Our fair value is based on WACC of 6% and TG of 0.5%. Maxis is still the largest telco in terms of revenue market share with quality of service as differentiation to drive leadership in data adoption. Focus will be on service impact due to lesser spectrum allocations and spectrum fee impact on dividend.

Source: Hong Leong Investment Bank Research - 19 Jul 2018