1H16 results came in below our, but largely within the street, expectations. An interim tax exempt dividend of 5.0 sen was announced. Maxis maintained its flattish FY16 guidance despite challenges ahead. We have tweaked our FY16/17E earnings by - 6.0%/-2.7%, after lowering the turnover (on the back of lower pre- & post- paid ARPU assumptions) and raised the direct and marketing cost assumptions. Maintain MARKET PERFORM but with lower TP of RM5.85 (from RM5.90 previously), based on targeted FY17E EV/forward EBITDA of 12.4x (representing an unchanged -1.5x standard deviation below its 4-year mean).

Below expectation. 1H16 core PATAMI of RM908m (-6.7 YoY) came in below our (46.7% of the full-year estimate) but largely within (48.5%) the street expectations. The negative deviation on our end was mainly due to weaker-than-expected mobile revenue and higher OPEX (on the back of higher traffic-related cost (from increased IDD traffic) and marketing expenses (due to new product launches in 2Q16). The 1H16 core PATAMI was arrived after excluding RM71m home-related contract obligations reversal and asset impairments, (ii) RM41m unrealized forex gains, and (iii) RM12m accelerated depreciation net of tax. Note that, the group’s 1H results normally accounted for c.50%-54% of full-year results for the past five years.

Declared a single-tier tax-exempt dividend of 5.0 sen, (ex-date: 26th Aug), bringing its 1H16 total DPS to 10.0 sen (1H15: 10.0 sen). For the full financial year, we expect the group to announce 20.0 sen (vs. 21.2 sen of the consensus), implying a yield of 3.3% and 88% pay-out ratio (or c.87% of FCF).

YoY, 1H16 revenue dipped by 0.4% to RM4.2b due to lower services revenue (-0.8%) but largely offset by higher non-services revenue (+35.4%). Its mobile revenue retreated by 1.6%, no thanks to the lower prepaid revenue (-4.3%) on the back of lower subscriber base. Postpaid turnover, meanwhile, inched up by 1.3% due to higher MaxisONE plan subscriptions (1.3m vs. 512k a year ago with lower ARPU of c.RM143/month) that was driven by Datapool feature. Normalised EBITDA was lowered by 1.4% to RM2.16b, with margin dipping 50bps to 51.0% (vs. 51.5% in 1H15).

QoQ, prepaid revenue stood at RM959m (-5.3%) driven by lower subscription base, which was affected by intense price competition. Prepaid ARPU, however, remained relatively stable at RM38, supported by higher Mobile Internet usage. Postpaid revenue, meanwhile, also declined by 1.7% to RM975m (due to heightened price competition, which resulted in a lower subscription base) with ARPU flat at RM102. Maxis recorded a total of 124k subscribers’ net loss in 2Q16, narrowing its total subscriber base to 11.0m. LTE network population coverage widened to 87% (vs. 74% in 1Q16) while its 2G & 3G modernisation plan has achieved 93% (2Q15: 81%).

Moving forward, we expect the current war in the mobile space to remain as we have yet to see any sign of abatement. Meanwhile, the new entrance of TM’s Webe, which offers an unlimited data package, could potentially add fuel to the battleground should the incumbents decide to response. Having said that, we understand Maxis remains fairly confident to see a better 2H, in view of its recent upgraded MaxisONE plan (higher data quota with datapool feature) and Hotlink package (free 8GB/month for life), which have received higher subscriber acquisition momentum thus far. Maxis is expecting the positive momentum to continue in 2H, supported by its vast 4G network as well as more innovative products launching.

Maintained FY16 guidance, where Maxis is expecting its service revenue, absolute normalised EBITDA and base capex to remain at similar levels to FY15. Note that, Maxis has recorded RM8.5b, RM4.4b, and RM1.3b for the above financial parameters in FY15, respectively.

Source: Kenanga Research - 21 Jul 2016