Maxis reported a disappointing set of results – 2018 core net profit declined by 15% yoy to RM1.77bn due to lower service revenue and RM250m one-off expenses incurred in 4Q18; full year DPS remained unchanged at 20 sen. Management has unveiled its new strategy, aimed at transforming Maxis into Malaysia’s leading converged communications and digital service company by 2023. However, short-term, management expects Maxis’ 2019 EBITDA to weaken by mid-single digit. While we like the new strategy, we do not expect material earnings contribution from these new businesses in 2019- 21E. Maintain SELL. For exposure, we prefer Digi for its higher dividend yield and relatively brighter 2019E earnings outlook.

Weaker 2018 core net profit of RM1.77bn (-15% yoy), below expectations

Maxis reported a disappointing set of results – 2018 core net profit of RM1.77bn (-15% yoy) only accounted for 93% of street and 91% of our full year earnings forecast. The earnings miss was due to a lower than expected 2018 EBITDA margin of 41% (from 44.1% in 2017) following the recognition of RM250m one-off expenses in 4Q18. These one-off expenses are new investments / initiatives launched to drive future growth, ie. investment in the launch of Fibernation (fiber customer retention initiatives), network improvement, increased operating & maintenance expenses from investment for productivity programme, and mobilisation of Enterprise business growth opportunities.

2018 Mobile Service Revenue Slipped by 3.1% Yoy

Maxis reported lower 2018 mobile service revenue of RM7.47bn (-3.1% yoy) due to a steep decline in prepaid service revenue (-11.4% yoy), partly cushioned by higher postpaid revenue of RM4.07bn (+5.1% yoy). While the postpaid segment has seen an increase in subscribers to 3.19m in end-Dec 2018 (+10% yoy), its 2018 ARPU has slipped by 2.9% yoy to RM93/month. Sequentially, 4Q18 mobile service revenue grew by 1.2% qoq to RM1.90bn, relatively unchanged (+0.06% yoy).

New Business Strategy – Broader Services Across a Wider Base

Management has unveiled Maxis’ new long-term growth strategy; management intends to transform Maxis from a consumer & mobile-centric telco to Malaysia’s leading converged communications and digital services company by 2023. Under the strategy, Maxis will increase its focus on the Enterprise segment and offer converged services such as mobile and fixed connectivity, managed services, cloud services and IoT solutions.

Cautious 2019 Guidance – EBITDA May Decline by Mid-single Digit

Moving into 2019, management expect its 2019 service revenue to decline by low single digit and EBITDA to fall by mid-single digit. The EBITDA decline could be due to the scaling down of U-Mobile network sharing arrangement, investment in fibre customer acquisition and negative impact from sales & service tax; productivity and working capital improvement should partly mitigate the negatives. On top of its base capex guidance of RM1bn (similar to 2018 level), management has guided for additional growth capex of RM1bn to be spent over 3 years.

Cutting 2019-20E EPS Forecasts by 6-8%

We have lowered our 2019-20E EPS forecasts by 6-8% after incorporating higher operating expenses and investment costs, in tandem with management’s latest guidance. While we like management’s new initiatives to expand its product offerings and customer base, we do not expect these new initiatives to contribute to Maxis’ 2019-20E profitability.

Maintain SELL

Maintain SELL with an unchanged DCF-derived price target of RM5.00 – we expect higher long-term growth to offset the increase in medium-term capex / investment costs. For exposure to the domestic cellco segment, we prefer Digi (HOLD, TP RM4.45) for its higher 2019E dividend yield of 4.4% and brighter earnings outlook (+2.8% in 2019E, vs Maxis’ -5.8% decline). Key risks to our negative view include: (i) stronger than expected service revenue growth; (ii) lower than expected operating costs; and (iii) better than expected investor receptions on Maxis; new strategy.

Source: Affin Hwang Research - 18 Feb 2019