Maxis’ 1Q18 core net profit at RM510m (unchanged yoy) was within market and our expectations. The results was a mixed bag - service revenue fell by 6% yoy due to lower subs (-8%) and flattish ARPU; on the other hand, lower operating costs (reduction in IDD / roaming costs and one-off write-back on impairments) had mitigated the decline in revenue. Maxis declared 5 sen dividend, as expected. We maintain our SELL rating with a revised TP of RM5.40 (from RM5.42). At 24x 2018E PER, valuation looks stretched, considering its competitive market environment and a likely EPS contraction in 2018.

Flat 1Q18 Core Profit at RM510m, Within Expectations

Maxis’ 1Q18 service revenue fell by 5.6% yoy to RM1.83bn on lower numbers of active subs (-824k to 9.85m) and flattish blended ARPU of RM56 / month. Elsewhere, the group achieved lower device sales of RM236m (-15% yoy), resulting in a 6% decline in total revenue (RM2.24bn in 1Q18). Notwithstanding the weaker revenue, Maxis achieved a higher EBITDA margin of 44.7% (from 43% in 1Q17) on lower operating costs, attributable to lower IDD / roaming costs (renegotiated in 2017) and writeback of O&M related impairments. Coupled with lower net interest expenses, Maxis’ 1Q18 core net profit came in unchanged yoy at RM510m (26-27% of consensus and our full year earnings forecasts), within expectations.

Sequentially, Core Profit Was 2% Weaker

Sequentially, Maxis’ 1Q18 core net profit was 2% weaker. Service revenue fell by 3.3% qoq on lower contributions from both prepaid (-3% in numbers of subs) and postpaid segments (lower ARPU of RM92, from RM96). Nonetheless, lower costs and absence of impairments has helped improved 1Q18 EBITDA margin and cushioned the decline in earnings.

Adoption of MFRS 15 distorted revenue and EBITDA, overall impact to net profit was relatively minor, no impact to free cash flow

Maxis Has Adopted MFRS 15 (Revenue From Contracts With Customer) and restated its 1Q17 / 2017 financial statements. Post MFRS 15 adoption, the group will now expense device cost (sold as part of bundled mobile plan) instead of amortising over the contract period. Based on its restated 1Q17 numbers, we have observed an increase in revenue, higher direct costs, and lower amortisation expenses. The net impact to reported 1Q07-4Q07 quarterly earnings range from -3% to +2%. The impact was highest in 4Q17 when device sales was highest due to new phone model launches.

Source: Affin Hwang Research - 20 Apr 2018