1H17 results showed some signs of improvement operationally. Despite decent 1H numbers, Maxis is maintaining its flattish year-on-year growth target for FY17. We have raised our FY17E/FY18E earnings by c.1-2% post the result review. Upgraded to OUTPERFORM call with higher DCF-driven TP of RM5.90 (WACC: 6.7%, TG: 1.5%) as we believe the recent share price weakness could provide accumulation opportunity.

Showing signs of improvement. 1H17 core PATAMI of RM998m (+9.5% YoY) came in within expectations at 49.5%/52.3% of our/consensus’ fullyear estimates. The higher core PATAMI growth (on a YoY basis) was mainly due to: (i) higher service revenue (+2% YoY), and (ii) higher EBITDA and margin. Note that, the 1H17 core PATAMI was arrived at after removing RM45m unrealized forex gain and RM62m reduction of service fee charge as well as adding RM26m tax effect arising from the above adjustments. It declared a second interim single-tier tax-exempt dividend of 5.0 sen (ex-date: 28th Aug.), bringing the total DPS to 10.0 sen in 1H17 (1H16: 10.0 sen). For the full financial year, we expect Maxis to reward shareholders with 20.0 sen DPS, implying a yield of 3.6%.

YoY, 1H17 service revenue climbed to RM4.25b (+2% YoY) on the back of steady prepaid (+1.3%) and postpaid (+0.6%) performance amidst intense competition. Its blended ARPU continued to show a steady growth to RM58 (1H16: RM54) despite total RGS base lower at 10.4m vs. 11m a year ago. The group’s MaxisONE plan subscriber base, meanwhile, increased to almost 1.9m with ARPU of RM120/month vs. 1.3m and RM142 a year ago respectively. Normalised EBITDA grew by 2.6% to RM2.2b (mainly driven by higher revenue base and efficient marketing spend), with margin inched higher to 51.4% (vs. 51.2% in 1H16).

QoQ, prepaid revenue stood at RM984m (-2%) in 2Q17 as a result of lower customer base (-133k to 7.48m, impacted by SIM consolidation) 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 climbed marginally by 1% to RM998m, mainly driven by higher subscriber base (+41k to 2.78m). MaxisONE’s subscribers, meanwhile, accounted for 68% (or 1.9m users vs. 1.79m in 1Q17) of the group’s postpaid user base with ARPU softening by RM1 to RM120.

Maintain FY17 guidance. Despite posting a decent 1H number, 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. We were not overly surprised given the recent termination of U Mobile NSA agreement that could partially neutralise the positive contribution posted in 1H17.

Priority tasks for the remaining months include: (i) moving from products to solutions and going all-out digital, (ii) creating unmatched customer experience across technologies, services and channels, as well as (iii) maintaining network advantage through leveraging scalable capacity design and to focus on indoor experiences.

Upgrade to OUTPERFORM with a higher DCF-driven TP of RM5.90 (vs. RM5.85 previously). We have raised our FY17/FY18E PATAMI by 0.7%/1.5% after revising the service revenue annual growth rate (to 0.4%/- 0.4% from -0.5%/-1.5% previously) and OPEX assumptions post the result review. Maxis’ share price has weakened by c.10% since early June, which we believe had largely reflected the negative news flow arising from: (i) the recent equity fund raising exercise, and (ii) termination of U Mobile NSA agreement. Trading opportunity could potentially arise from here. Thus, we have raised our MAXIS rating to OUTPERFORM (from MARKET PERFORM previously) with a potential total return of more than 10% from here.

Source: Kenanga Research - 21 Jul 2017