Results

• Improved earnings - Maxis reported a strong net profit of  RM320m in 1Q23, which increased 7.4% YoY due to higher revenue  and lower tax rate following the absence of Cukai Makmur. 

• Higher revenue – Quarterly revenue was higher (+5% YoY) at  RM2.3b thanks higher Service revenue (+4% YoY to RM2.11b). Under Service revenue, Consumer revenue rose 6.4% YoY to  RM1.75b following gains in Postpaid (+10% YoY to RM864m), Prepaid (+0.6% YoY to RM661m) and Fibre (+17.8% YoY to  RM192m) to cushion the decline in Wireless Broadband. Meanwhile,  Enterprise revenue grew 5.5% YoY to RM365m while Device sales  gained 10% YoY to RM414m.

• Better QoQ due to lower tax – Maxis’ 1Q23 net profit of RM320m  surged 34% QoQ due absence of Cukai Makmur as quarterly  revenue was 1% QoQ lower at RM2.53b due to flat Service revenue  and Enterprise revenue while Device sales declined 6% QoQ.

• Steady margins – Maxis’ EBITDA margin was 0.2 ppts lower at  38.5% compared to the previous quarter as EBITDA declined 1.6%  QoQ to RM972m due to higher device costs.

• Prepaid churn intensified – Total subscribers dropped 26k QoQ  to 9.771m as higher subscribers in Postpaid (+54k to 3.3974m) and  Home Connectivity (+19k to 688k) were unable to cushion the  decline in Prepaid (-99k to 5.686m) due to clean-out of non-revenue  SIM cards.

• Higher gearing. Net debt/EBITDA was higher at 2.47x (vs 2.35x in  4Q22) as net debt increased 6% QoQ to RM9.82b while cash  balance declined 46% QoQ to RM340m.

• Lower dividend declared. Maxis declared its first interim dividend  of 4 sen, which lower than 5 sen previously. The management is  conserving cash for investments and will not provide dividend  guidance until more clarity on the government’s 5G policy. We are  concerned on the dwindling cash position which could impact future  dividends. However, we are maintaining our full year dividend  forecast of 20 sen at the moment.

Earnings Outlook / Revision

• Results within expectation. 1Q23 net profit of RM320m achieved  21%/23% of our/consensus full year forecast while three months  revenue of RM2.53b (+6% YoY) accounted for 26%/25.5% of  our/consensus FY23 estimate. 

• We keeping our earnings forecast for FY23 as we expect  earnings to pick up as the one-off Cukai Makmur expired in 2022  and corporate tax rate revert back to 24%. 

• Major risks for the stock include: a) Price competition and threat  from Digi-Celcom merger, b) Higher-than-expected capex investment  c) Heightened regulatory risk by the new government.

• Management guidance. The management has guided 2023  service revenue with flat to low single digit growth, EBITDA and  capex to be similar with FY22 around RM3.9b and RM1.1b  respectively.

Valuation and Recommendation

• Downgrade to HOLD with an unchanged target price of  RM4.44 following the surge in share price. Our target price is based  on DCF valuation (WACC of 5.6% with a long-term growth rate of  0.5%) and implies 19.7x FY23F PE based on EPS of 19.2 sen.  

Source: JF Apex Securities Research - 22 May 2023