Result

• Maxis reported a normalised PAT of RM510m in 1Q18. The quarterly normalised PAT decreased by 1.9% qoq whilst remained flat yoy. Meanwhile, quarterly revenue dropped 5.9% qoq and 5.8% yoy.
• Meeting market expectations. The Group’s normalised PAT of RM510m was within our and market consensus, meeting 24.32% and 25.74% of full year estimate respectively.

Comments

• Lower earnings qoq due to lower mobile and service revenue. The Group reported a lower normalised PAT qoq mainly due to lower prepaid revenue (lower subscribers along with flat ARPU) and postpaid revenue (lower ARPU which offset higher subscribers).

• Flattish yoy earnings maintained by better cost rationalisation. A 5.9% qoq decline in 1Q18 revenue was due to lower service revenue. However, the Group recorded a higher normalised EBITDA margin of 2.5 ppts to 45.6% from 43.1% in 1Q17, thanks to lower direct costs, operation and maintenance costs which partially offset the lower revenue.

• Strong growth from postpaid segment. Postpaid subscriber grew 2.1% (2.853m) qoq and 6.1% (2.744m) yoy to 2.912m amid continued demand for data. However, postpaid ARPU declined to RM92 from RM103 (-10.7%) qoq and RM102 (-9.8%) yoy due to intense competition from other telco and line sharing program under Maxis Oneplan.

• Unfavourable revenue from prepaid segment. Prepaid ARPU remained soft after maintaining at RM41 qoq but declined by 2.4% yoy from RM42. Besides, prepaid subscriber posted a decrease of 3.0% qoq and 12.5% yoy from 6.997m and 7.754m to 6.786m respectively. Overall, the decline in prepaid revenue was mainly due to price focused competition and migration from prepaid to postpaid.

• Slightly higher gearing. The Group recorded a slightly higher net debt/EBITDA at 1.77x from 1.63x driven by lower EBITDA in 1Q18 as compared to 4Q17, whilst cash and bank balances decreased 37.5% to RM376m from RM602m mainly due to payment of dividends.

• Adoption of MRFS 15. The change of the new accounting treatment affected 1Q18 as we witnessed: a) RM218m increase in revenue, b) RM316m decrease in traffic, commissions and other direct cost, and c) RM94m decrease in depreciation and amortisation.

• Dividend declared. The Group has declared its 1st interim dividend of 4.9 sen/share.

• Outlook. Management guided that its: a) FY18 service revenue to decline in low-to-mid single digit, , EBITDA to drop in high single digit (due to 700Mhz and 2100Mhz spectrum fees), capex budget of RM1b and free cash flow (excluding upfront spectrum fees) to be similar to FY17.

• Moving forward, the management foresees that the Group will continue to generate positive growth from their postpaid segment as they received a good feedback from the new launch of postpaid plan (Hotlink Postpaid Flex) which will continue to drive the Group’s postpaid revenue.

Earnings Outlook/Revision

• We maintain our earnings forecast for FY18F whilst upgrade FY19F earnings by 3% as we believe that the Group will be able to generate a better margin due to continuous cost optimization initiatives.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM5.98 (previously RM6.03), based on DCF valuation with WACC of 8.02% and a long term growth rate of 2.5%. Our target price implies a 22.3x FY18 PE based on EPS of 26.9sen.

• We remain NEUTRAL on Maxis as we do not foresee any potential catalyst in the near term which will drive the Group’s future earnings. Risks are potential price war with challenges in differentiating their products from other peers and the group is unable to arrest the decline in prepaid revenue. However, we notice that the Group is able to generate a higher profit margin as compared to others telcos.

Source: JF Apex Securities Research - 20 Apr 2018