Result

• Maxis reported a normalised PAT of RM480m in 2Q18.

The quarterly normalised PAT decreased by 5.9% qoq and 16.1% yoy. Meanwhile, quarterly revenue remained flat, +0.4% qoq and -3.8% yoy.

• For 1H18, the Group attained a lower topline and bottomline growth of 4.8% and 8.5% respectively.

• Meeting market expectations. The Group’s normalised PAT of RM480m accounted for of 47.17% and 50.18% of ours and market consensus’ full year estimate respectively.

Comments

• Lower earnings QoQ due to lower margin. The Group’s normalised EBIT declined 5.4% QoQ while EBIT margin lost 2ppts in 2Q18, mainly due to higher depreciation expenses.

• Decreased YoY earnings due to lower revenue and margin. A 3.8% YoY decline in 2Q18 revenue was due to lower service revenue as prepaid revenue decreased 13% YoY. Besides, the Group recorded a lower normalised EBIT margin of -5.7ppts to 32.2% from 37.9% in 2Q18, again, due to higher depreciation expenses and high upfront spectrum cost.

• Weaker 1H18 earnings, again due to lower revenue and lower margin. For 1H18, the group recorded a lower service revenue, -4.8% (lower prepaid revenue offset higher postpaid revenue). Besides, the lower normalized EBIT was reported as a result of higher depreciation expenses.

• Strong and steady growth from postpaid segment. Postpaid subscriber grew 2.0% QoQ and 6.6% YoY, thanks to steady growth in subscription base stemming from growth in shared lines (MaxisONE Plan). Beside, postpaid ARPU increased to RM94 from RM92 (+2.2%) QoQ, thanks to higher demand for data but decreasing 4.2% yoy from RM96 due to intense competition from other telcos.
• Continued disappointing revenue from prepaid segment. Prepaid ARPU improved +2.4% QoQ (from RM41 to RM42) and maintained at RM42 YoY. Besides, prepaid subscriber posted a decrease of 3.3% QoQ and 4.6% YoY. Overall, the decline in prepaid revenue was mainly due to SIM consolidation and migration to postpaid to prepaid segment.
• Slightly higher gearing. The Group recorded a slightly higher net debt/EBITDA at 1.70x from 1.68x driven by lower EBITDA in 2Q18 as compared to 1Q18, whilst cash and bank balances decreased 39.4% to RM524m from RM.76m mainly due upfront spectrum assignment fees paid in 1Q18.

• Dividend declared. The Group has declared a 2nd interim dividend of 5.0 sen/share.

• Management has guided that: a) FY18 service revenue to decline by low-to-mid single digit, b) EBITDA to drop by high single digit (due to 700Mhz and 2100Mhz spectrum fees), c) 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 maintain its 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. Besides, the Group expects to maintain its prepaid ARPU due to its recently launched Prepaid pack (Hotlink Red), which has attracted high data users.

Earnings Outlook/Revision

• We maintain our earnings forecast for FY18F and FY19F

as we believe that the Group is able to maintain stable postpaid revenue growth rate.

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM5.98, based on DCF valuation with WACC of 8.02% with a long term growth rate of 2.5%. Our target price implies a 22.3x FY18F PE based on EPS of 26.87sen.

• We remain NEUTRAL on Maxis as we do not foresee any potential catalyst in which will drive the Group’s future earnings. Risk is potential price war with challenges in differentiating their products from other peers such as Digi, while the Group is still in a midst of arresting the decline in prepaid revenue. We noted that the Group is able to generate a higher profit margin in the future.

Source: JF Apex Securities Research - 19 Jul 2018