1Q17 results came in within expectation. The 5.0 sen interim tax exempt dividend was also no surprise. Maxis is maintaining its flattish year-on-year growth target in FY17 despite challenges ahead. We have fine-tuned our FY17E/FY18E earnings by c.1% post the result review. Downgraded to UNDERPERFORM call with an unchanged DCF-driven TP of RM6.20 (WACC: 6.7%, TG: 1.5%).

In-line. 1Q17 core PATAMI of RM510m (+5.8% YoY) came in within expectations at 26%/27% of our/consensus’ full-year estimates. The higher core PATAMI growth (on a YoY basis) was mainly due to lower property, plant and equipment related charges and tax expenses. Note that, the 1Q17 core PATAMI was arrived at after adding RM5m unrealized forex losses, net of tax. It declared a first interim single-tier tax-exempt dividend of 5.0 sen (ex-date: 29th May). For the full financial year, we expect the group to reward shareholders with 20.0 sen DPS (vs. consensus 20.2 sen), implying a yield of 3.1%.

YoY, 1Q17 service revenue was stable at RM2.1b (+0.3% YoY) in spite of intense price competition, thanks to higher contribution from the Enterprise Fixed (+7.5%) and Integrated Services segments (+26%) albeit the growth was being partially offset by softer mobile revenue (-0.5%). The group’s MaxisONE plan’s subscriber base, meanwhile, increased to almost 1.8m with ARPU of RM121/month vs. 962k and RM150 a year ago. Normalised EBITDA growth was lowered by 3.3% to RM1.12b (as a result of higher network cost; operation & maintenance expenses (mainly a result of investment for future efficiencies) and one-time resource costs adjustments attributed to performance incentives), with margin reduced to 51.8% (vs. 54.0% in 1Q16).

QoQ, prepaid revenue stood at RM1b (-1.3%) as a result of lower customer base (-192k to 7.75m) but partially cushioned by the stable ARPU (of RM42) as well as stronger acceptance of its Hotlink FAST pack (which was successful in acquiring higher mobile internet ARPU users). Postpaid revenue, meanwhile, was lower by 2.1% to RM989m, no thanks to lower ARPU (RM102 vs. RM104) despite higher subscriber base (+32k to 2.7m). MaxisONE’s subscribers, meanwhile, accounted for 65% (or 1.79m users) of the group’s postpaid users base with ARPU of RM121. LTE network population coverage widened to 89% (vs. 88% in 4Q16 and 74% a year ago).

Maintain FY17 guidance. Maxis is maintaining its FY17 KPIs, where the group is expecting the service revenue, absolute normalised EBITDA and base capex to come in at similar levels to FY16. Note that Maxis recorded RM8.5b, RM4.5b, and RM1.2b for the above financial parameters in FY16, respectively.

Priority tasks for the remaining months include: (i) move from products to solutions and going all-out digital, (ii) create unmatched customer experience across technologies, services and channels, as well as (iii) maintain network advantage through leveraging scalable capacity design and to focus on indoor experiences. We concur with management’s strategies given that the prices offered by Cellcos are already at very competitive levels. Thus, key differentiating factors are likely to come from value-added services as well as consumer experience (as a reflection of the network coverage/quality).

Raised FY17/FY18E net profits by 1.0%/0.9% after fine-tuning. Although the group’s FY17 performance is expected to remain lacklustre (in view of the uninspiring service revenue growth), its index weighting position and Shariah-compliance status could somehow provide solid support to its share price. We, however, downgraded our MAXIS rating to UNDERPERFORM (from MARKET PERFORM previously) given the group’s total return is less than 3% from here.

Source: Kenanga Research - 28 Apr 2017