Despite posting solid operational and financial performances in 3Q18, MAXIS is expecting to face a more difficult operating environment in view of the challenges ahead. Minor tweak to our FY18E/FY19E numbers, post the results review. Maintain MARKET PERFORM call with an unchanged DCF-driven TP at RM5.55.

In-line. 9M18 core PATAMI of RM1.51b (-3% YoY) came in within expectations at 77%/78% of our/street’s full-year estimates. The lower PATAMI (on a YoY basis) was mainly due to the decline in Prepaid (-13%), which was partially cushioned by the growth in Postpaid (+5%) and Home Fibre business (+18%). As expected, it declared a single-tier tax-exempt dividend of 5.0 sen, bringing the 9M18 DPS to 15.0 sen.

YoY, 9M18 service revenue dipped to RM6.0b (-3.4% YoY), mainly due to the decline in Prepaid (-13%, due to SIM consolidation and migration to Postpaid) that offset the growth in Postpaid (+5%, driven by innovative device offerings and stable ARPU) and Home Fibre business (+18%, thanks to new affordable subscription plans). Normalised EBITDA declined by 2.4% to RM3.0b with margin (as a percentage of its service revenue) climbing to 51.1% (vs. 50.5%) as a result of continuous cost optimisation initiatives (in particular, the traffic, commissions & other direct costs). Blended data consumption increased to 10.7GB (vs. 5.6GB in 3Q17), supported by higher smartphone penetration rate of 84% (vs. 80% a year ago).

QoQ, Prepaid revenue was lower marginally by 0.4% to RM851m in 3Q18 as a result of lower subscribers’ base (-108k to 6.6m) albeit its ARPU maintaining at RM42. Postpaid revenue, meanwhile, climbed 1.6% with higher subscriber base of 3.0m (+85k) and stable ARPU of RM93 (-RM1). The growth was mainly fueled by strong demand of its innovative device and value-accretive propositions. Home Fibre revenue improved by 13% to RM80m with subscriber base growing to 202k (+8m). The group has received over 40k sign-ups since the introductions of more affordable fixed broadband plans post the new access arrangements with Telekom Malaysia were announced in August.

Moving forward, Maxis is set to continue to drive Enterprise Business solutions supported by higher momentum of business fibre. Besides, the group also plans to enhance its digital capabilities through the digital transformation programme and widen its market share in the home fibre segment. Having said that, management is expecting to face strong headwinds ahead in view of the network sharing arrangement termination, SST reintroduction, fibre broadband re-pricing and intense competition.

Maintain FY18 guidance. Despite the market expected to remain competitive, Maxis is maintaining its FY18 guidance with service revenue and EBITDA set to decline by mid-to-single-digit and 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.

Maintained MARKET PERFORM rating with an unchanged DCF-driven TP at RM5.55. Post results review, we have tweaked our FY18E/FY19E PATAMIs by 1.3%/2.4% after some fine-tunings. We maintain MARKET PERFORM call to Maxis with an unchanged DCF-derived target price at RM5.55 (WACC: 6.8%; 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 Oct 2018