Broadly In-line

Maxis’s 9M17 earnings was broadly in-line with expectations. 3Q17 service revenue improved, after two consecutive quarters of decline. While the prepaid segment remains under pressure, the postpaid division continues to see expansion, driven by subscriber growth and higher data usage. Nevertheless, we keep our HOLD rating and TP of RM5.30 as we expect earnings contraction in 2018.

9M17 Results Up 10% - Broadly In-line

Maxis’s 9M17 core profit of RM1.6bn (+9.7% yoy) was broadly within expectations accounting for 79% and 80% of our and consensus 2017 estimates respectively. The slightly better-than-expected earnings can be attributed to the EBITDA margin improvement in 3Q17 (53.5% vs 50.8% in 2Q17) and also a lower effective tax rate of 23.8% during the quarter (9M17: 25.2%). The better margins for the quarter can be attributed to the +2.1% qoq service revenue growth and also lower traffic cost and maintenance charges. Another 5-sen DPS was announced in 3Q17, bringing the 9M17 DPS to 15 sen, in-line with expectations.

3Q17 Service Revenue Improves

Despite a 3% qoq and 7% yoy decline in the subscriber base, Maxis registered 9M17 service revenue growth of 1.8% on the back of firmer ARPUs. More importantly, this was the first quarter of improvement after two consecutive quarters of decline. The service revenue improvement is nevertheless driven by the postpaid division (postpaid revenue up 5.7% qoq), which also continued to see subscriber growth vis-à-vis the decline in the prepaid segment. The postpaid revenue growth remains driven by its leading infrastructure network (89% LTE population coverage) and hence the high data usage (7.8GB/mth vs 3.7GB/mth a year ago)

Maintain HOLD and TP of RM5.30

We leave our forecasts unchanged and maintain our Hold rating and 12- month DCF-derived TP of RM5.30. While Maxis has registered commendable earnings growth for 9M17 amidst stiff market competition, we expect earnings to contract over 2018-2019E from the progressive termination of the 3G RAN sharing agreement with U Mobile by end-2018. Management guided that the revenue impact from this would only be from 2018. Nevertheless, with strong cashflows and its market leadership position given its extensive network infrastructure and strong branding, we maintain our HOLD rating. Key downside risks include heightened price competition while higher dividends would be an upside risk.

Source: Affin Hwang Research - 26 Oct 2017