1Q18 results came in within expectation, underpinned by solid postpaid performance and continued cost optimisation. Maxis has revised its FY18 earnings guidance lower to reflect the adoption of new accounting principles. We have also lowered our FY18E/FY19E PATAMI by -3%/-2%, post the results review. Maintain MARKET PERFORM call with lower DCF-driven TP at RM6.05 (WACC: 6.6%, TG: 1.5%).

In-line. 1Q18 core PATAMI of RM510m (flat YoY; -1.9% QoQ) came in within expectations at 25.4%/25.7% of our/street’s full-year estimates. The stable PATAMI (on a YoY basis) was mainly due to solid EBITDA as a result of continuous cost optimization initiatives despite lower service revenue. As expected, it declared a single-tier tax-exempt dividend of 5.0 sen, translating into a payout ratio of 76.6%.

Adopting new accounting principles. Similar to its peers, MAXIS also adopted MFRS 15 Revenue From Contracts With Customers using a modified retrospective approach (where the sale of device bundles with discounts will be affected by the timing of revenue recognition) with effect from 1 January 2018. Note that, MAXIS had restated its FY17 financial based on the MFRS 15, which has a negative impact to its income statement of RM254m/RM401m/RM13m in service revenue/EBITDA/ PATAMI, respectively. The MFRS 9, meanwhile, will have an impact on the balance sheet in relation to the classification and measurement of financial asset and the impairment model.

YoY, 1Q18 service revenue dipped to RM2.0b (-4.6% YoY), mainly due to the decline in Prepaid (-16%), which offset the growth in Postpaid (+5%, thanks to strong subscription base coupled with stable ARPU). The lower Prepaid performance was mainly impacted by lower subscription base due to the continued SIM consolidation, prepaid to postpaid migration and intense price competition. Normalised EBITDA remained stable at RM1.0b with margin (as a percentage of its service revenue) climbing to 51.5% (vs. 49.3%) as a result of continuous cost optimisation initiatives (in particular the traffic, commissions & other direct costs as well as O&M expenses). Blended data consumption increased to 7.7GB (vs. 4.3GB in 1Q17), supported by higher smartphone penetration rate of 82% (vs. 78% a year ago). QoQ, Prepaid revenue was lower by 6% in 1Q18 as a result of lower customer base (-211k to 6.8m, impacted by SIM consolidation and intense price-focused competition) and flattish ARPU (RM41). Postpaid revenue also weakened by c.1% with lower ARPU of RM92 (-RM4, due to more shared lines) followed by less MaxisONE subscriber base (-5k to 2.0m, the first decline since 2Q15).

Focus on providing unmatched digital experience. Market competition is expected to remain intense with data quality and pricing continuing to be the key focus to attract subscribers. The group is set to remain focused on its digital transformation journey and enhance digital capabilities to be a new key differentiator. Continued strengthening of its MaxisOne plans with innovative product offerings will be the key focus under the postpaid segment while differentiated propositions that engage high mobile Internet users and enable a high-speed digital lifestyle remain its key strategy under the prepaid division.

Revised FY18 guidance. MAXIS had revised its FY18 guidance to reflect the changes in the accounting treatment required under MFRS 15. Accordingly, service revenue and EBITDA are expected to decline at mid- single digit and high single-digit levels (vs. low and mid-single digit previously), respectively. There is no change to its base capex (at c.RM1b) and free-cash-flow guidance (a similar level as FY17 at c.RM1.5b); thus, suggesting that the annual DPS is likely to remain unchanged.

Reiterate MARKET PERFORM call with lower DCF-driven TP at RM6.05 (vs. RM6.10 previously) after revising our FY18E/FY19E EBITDA annual growth rate to -6.9%/1.5% (vs. -5.1%/1% previously) on the back of lower service revenue growth of -5%/1% (vs. -3%/2% previously). We will start to re-accumulate the stock should the share price retreat to below RM5.50.

Source: Kenanga Research - 20 Apr 2018