Maxis’ 4Q17 service revenue fell by 1.7% qoq on lower prepaid subs, translating to 2% decline in core profit. Operationally, FY17 revenue (+1% yoy) and EBITDA (-1% yoy) came in within our expectations but core net profit (+6% yoy) was 5% above due to lower than expected tax rate and depreciation expenses. Moving into 2018, management sees mid single digit decline in EBITDA, which we agree. Maintain SELL. At 25x 2018E PER, valuation looks stretched, considering its competitive market environment and a likely EPS contraction in 2018.

Weaker 2017 EBITDA (-1%), Core Profit Lifted by Lower Interest Cost

Maxis’ 2017 EBITDA fell by 1% to RM4,558m on lower EBITDA margin of 52.4% (-1ppt). Its core net profit has however increased by 6% yoy to RM2,086m, attributable to lower net finance cost (-7%, following placement of RM1.7bn new shares) and 2.2ppt reduction in effective tax rate to 24.3%. An RM78m unrealized forex gain and RM62m write-back of service fee lifted its reported net profit to RM2,192m (+9%). All in, the results are within market expectations but 5% ahead of our forecast due to a lower than expected tax rate and depreciation/amortization charges. Maxis declared a consistent, 5 sen dividend for 4Q17 (2017: 20 sen).

Lower 4Q17 Service Revenue (-1.7%), Core Profit (-2%)

Maxis’ 4Q17 core net profit fell by 2% qoq to RM538m on the back of a lower revenue (-3%) and higher depreciation & amortization costs (+5%), cushioned by lower net interest expenses (-18%). Service revenue slipped by 1.7% qoq on weaker prepaid contributions (-RM51m) as numbers of prepaid subs fell by 157k to 6,997k, partly mitigated by higher postpaid contributions (revenue grew by RM21m qoq to RM1,076m on 48k increase in subs). Elsewhere, Digi.Com had earlier reported a 2.5% qoq service revenue growth, driven by higher post-paid subs and active internet subscribers.

Management Sees Single-digit Decline in 2018E Revenue and EBITDA

For 2018, management expects: (i) a low single digit decline in service revenue; (ii) EBITDA to decline in mid single digit; (iii) base capex to be around RM1.0bn; and (iv) free cash flow (excluding upfront spectrum assignment fees) to be at a similar level to FY17. Maxis’ 2018 guidance is more cautious than Digi.Com’s outlook, which is expecting flat to low singledigit decline in service revenue but flat EBITDA.

Raising 2018-19E EPS Forecasts by 3-5% on Lower D&A, Tax Rate

We lowered our 2018-19E depreciation & amortization expenses and effective tax rate forecasts (to 24%), resulting in a 3-5% increase in Maxis’ 2018-19E EPS. We introduce our 2020E earnings forecast, expecting Maxis to achieve an unexciting 1% EPS growth on higher service revenue. This note marks a transfer of coverage.

Competitive Market, EPS Contraction, Maintain SELL

We raised our DCF-derived target price to RM5.42 (from RM5.30) after incorporating the earnings changes and roll forward our valuation horizon to 2018E. We maintain our tactical SELL rating on Maxis. Moving into 2018, we expect the Malaysian telco market to remain competitive. This, coupled with lower network sharing revenue from U Mobile should lead to a 11% EPS contraction. Key upside risks to our recommendation are strong service revenue growth and higher-than-expected costs savings.

For exposure on the sector, our top pick is TM (HOLD) for its relatively benign operating environment, anchored by steady demand growth. Axiata (HOLD) is our relative preference among the cellcos – we expect its earnings to recover in 2018E, driven by operational improvement at its overseas entities.

Source: Affin Hwang Research - 9 Feb 2018