9M16 results came in within our, as well as 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 fine-tuned our FY16E earnings by +1.8% but keeping the FY17E numbers unchanged. Maintain UNDERPERFORM with an unchanged TP of RM5.80, based on targeted FY17E EV/forward EBITDA of 12.1x (representing an unchanged -1.5x standard deviation below its 2-year mean). We believe there is room for the sector PER to de-rate, should incumbents start to lower dividend payout/payment to preserve cash for spectrums payment.

In-line. 9M16 core PATAMI of RM1.4b (+0.5 YoY) came in within expectation at 77% of our, and 75% of the street, full-year estimates. The 9M16 core PATAMI was arrived at after excluding RM71m home-related contract obligations reversal and asset impairments, (ii) RM34m unrealized forex gains, and (iii) RM16m accelerated depreciation net of tax. Note that the group’s 9-month results normally accounted for c.75%-78% of full-year results for the past five years. It declared a third interim single-tier taxexempt dividend of 5.0 sen, (ex-date: 28th Nov.), bringing its 9M16 total DPS to 15.0 sen (9M15: 10.0 sen). For the full financial year, we expect the group to pay 20.0 sen (vs. 20.9 sen of the consensus), implying a yield of 3.3% and 77% pay-out ratio (or c.82% of FCF).

YoY, 9M16 revenue was flat at -0.4% growth to RM6.4b due to lower services revenue (-1.2%) but largely offset by higher non-services revenue (+80%). Its mobile revenue retreated by 2.1%, no thanks to the lower prepaid revenue (-4.5%) on the back of intense price competition. Postpaid turnover, meanwhile, inched up by 0.4% supported by higher MaxisONE plan’s subscriber base (1.5m with ARPU of RM141/month vs. 636k and RM159 a year ago). Normalised EBITDA growth was flat at -0.1% to RM3.3b, with margin staying at 51.6% (vs. 51.4% in 9M15).

QoQ, prepaid revenue stood at RM1.0b (+6.6%) with ARPU increased RM3 to RM41, thanks to the stronger acceptance of its Hotlink FAST pack (which was successful in acquiring higher mobile internet ARPU users) and stable foreign worker segment contribution. Postpaid revenue, meanwhile, declined by 1.5% to RM960m with lower ARPU of RM100 (vs. RM102) as a result of increased data allocation across all MaxisONE plan. Maxis recorded a total of 83k subscribers’ net loss in 3Q16, narrowing its total subscriber base to 10.9m. LTE network population coverage widened to 81% (vs. 80% in 2Q16).

Spectrum payment scheme yet to be announce. Maxis is reluctant to share more colours on its 900Mhz and 1800Mhz spectrums payment, which is due to settle RM816.75m (or 44% of its total fee to retain the said spectrums for 15 years) by 1st November in a form of either instalments or lump-sum basis, should the group accepts MCMC’s offer. We believe the group is likely to amortise the fee throughout the spectrums’ useful life. We have yet to factor in the potential financial impact into our model.

Optimal capital structure (OCS) remains unchanged for now. We understand that Maxis is still pretty comfortable in keeping its OCS at 2.0x of its net debt/EBITDA (3Q16: 1.68x). This suggests that the group still has room to gear (up to RM1.1b, based on consensus’ FY16 EBITDA estimation) if needed. Dividend policy wise, the group is still maintaining its policy to reward its shareholders with a minimum 75% of its consolidated PAT but capped at available FCF.

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 recorded RM8.5b, RM4.4b, and RM1.3b for the above financial parameters in FY15, respectively

Source: Kenanga Research - 20 Oct 2016