1H18 results came in within expectation, underpinned by solid postpaid performance and continued cost optimisation. Maxis believed the fixed broadband and enterprise segments could provide growth opportunities once the regulatory environment becomes clear. Minor tweak to our FY18E/FY19E numbers, post the results review. Maintain OUTPERFORM call with an unchanged DCF-driven TP at RM6.05.

Within expectations. 1H18 core PATAMI of RM990m (flat YoY) came in within expectations at 50%/51% 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, bringing the 1H18 DPS to 10.0 sen.

YoY, 1H18 service revenue dipped to RM4.0b (-3.7% YoY), mainly due to the decline in Prepaid (-14%) that offset the growth in Postpaid (+6%) and Home Fibre business (+21%). 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 RM2.0b with margin (as a percentage of its service revenue) climbing to 50.8% (vs. 49.0%) 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 9.1GB (vs. 5.9GB in 2Q17), supported by higher smartphone penetration rate of 83% (vs. 79% a year ago). QoQ, Prepaid revenue was stable at RM854m in 2Q18 as a result of higher ARPU (RM42 vs. RM41, thanks to effective use of data analytics), better executed initiatives and narrowed decline in subscribers’ base (-39k to 6.7m, as a result of continued SIM consolidation and migration to Postpaid). Postpaid revenue, meanwhile, climbed by 2.4% with higher MaxisONE subscriber base (+67k to 2.09m) coupled with taller ARPU of RM94 (+RM2). The growth was mainly fueled by its strong demand of its innovative device and value-accretive shared line propositions.

Moving forward, Maxis will continue to focus on maintaining its leadership position by leveraging on its strong 4G network with leading coverage and speed. The group will continue focusing on building its flagship MaxisONE plan under the Postpaid market via providing more accretive family-centric offerings and innovative device propositions. In the prepaid segment, Maxis will maintain its focus on high mobile Internet users and profitable segments (i.e. the foreign worker segment), whilst expanding its use of data analytics for segmental offerings to drive incremental ARPU. On top of that, the group is also set to continue its digitalisation road path and believes that the fixed broadband as well as the enterprise segments could provide opportunities to expand in the future once the regulatory framework firmed up in 3Q18. While we concur with the management’s view, we believe Maxis may face a great challenge in the enterprise segment as its peers also have the same ambitions.

Maintained FY18 guidance. Despite the market expected to remain competitive, Maxis is maintaining its FY18 guidance with service revenue and EBITDA set to decline at mid-to-single-digit as well as high single-digit range, respectively. Base capex, meanwhile, is expected to come in at c.RM1b with free-cash-flow likely to come in at c.RM1.5b (a similar level as FY17). This suggests that the annual DPS is likely to remain unchanged.

Reiterate OUTPERFORM call with an unchanged DCF-driven TP at RM6.05. Post result review, we have tweaked our FY18-19E PATAMI by 0.4% each after some fine-tuning. The recent share price weakness could provide a great bargain hunting opportunity to investors. We maintain an OUTPERFORM call to Maxis with an unchanged DCF-derived target price at RM6.05 (WACC: 6.6%; TG: 1.5%). Risks to our call include (i) lower- than-expected service revenue growth, (ii) higher-than-expected OPEX, and (iii) stiffer competition.

Source: Kenanga Research - 19 Jul 2018