A higher-than-expected OPEX has dragged Maxis’ full-year performance in 4Q18. Maxis is aiming to transform itself from a consumer & mobile-centric telco into a converged player by the year 2023. Post the poorer result, anticipated higher transformation OPEX and latest management’s guidance, we lowered our FY19E PATAMI by 16% and downgraded the stock to UNDERPERFORM with a lower DCF-driven TP at RM4.90 (implied -1.0x EV/fwd. EBITDA below its 5-year mean).

Hit by higher OPEX. FY18 core PATAMI of RM1.77b (-15% YoY) came in below expectations at 92%/91% of our/street’s full-year estimates, no thanks to the higher-than-expected OPEX in 4Q18 that was led by one-off cost of RM250m (associated with the launch of a new strategy and to enhance operational efficiency). As expected, it declared a single-tier tax exempt dividend of 5.0 sen, bringing the full-year DPS to 20.0 sen.

YoY, FM18 service revenue dipped to RM8.1b (-2.5%) as a result of lower Prepaid segment’s performance (-11%, due to SIM consolidation and migration to Postpaid) but partially offset by higher growth in Postpaid (+5%, driven by innovative device offerings and stable ARPU) and Home Fibre business (+17%, thanks to affordable subscription plans). Normalised EBITDA declined by 8.4% with margin (as a percentage of its service revenue) softening to 47.1% (vs. 52.1%) due mainly to the one-off cost in 4Q18. QoQ, Prepaid revenue was lower by 0.7% to RM845m in 4Q18 as a result of lower subscribers’ base (-29k to 6.6m) albeit ARPU maintaining at RM42. Postpaid revenue, meanwhile, climbed 3% with higher subscriber base of 3.1m (+80k) and better ARPU of RM94 (+RM1). The growth was mainly fueled by premium experience and higher 4G data usage.

New strategy for future growth. Maxis has made a significant change to its strategy with an aim to become the leading converged communications and digital service player by 2023. The group has commenced scaling its business to address opportunities in Enterprise solutions and converged services across all segments. Maxis is targeting to spend an incremental capex of RM1b over the next 3 years to support this new strategy and its 5- year internal service revenue target of more than RM10b by 2023. While we believe the group’s strategy is heading towards the right direction, we view the internal service revenue target as a tall order for now given the heightened competition in the fixed broadband space coupled with an increasing competition in the Enterprise solutions and ICT segments. All these suggested that the group’s ICT initiatives could potentially face a longer gestation period.

Introduce FY19 guidance. Maxis is aiming to maintain its strong leadership position by leveraging on its extensive 4G network and expanding its presence in the fixed broadband market in both the Consumer and Enterprise segments. Having said that, the termination of RAN sharing arrangement with U Mobile, dilution impact in Fibre ARPU coupled with increasing customer acquisition costs as well as new regulatory policies are set to impact the group’s performance in FY19. All in, Maxis is expecting its service revenue and EBITDA to decline by low single-digit and mid-single digit, respectively. Core network capex is set to be c.RM1b with operating FCF (at c.RM1.36b) at a similar level to FY18.

Downgrade to UNDERPERFORM rating. Post results review, we have lowered our FY19E PATAMI by 16% (after raising our OPEX assumptions and taking management’s latest guidance into consideration) and introduce our FY20 numbers. With lower DCF-derived target price of RM4.90 (vs. RM5.55 previously; WACC: 6.7%; TG: 1.5%) we have downgraded our Maxis’ rating to UP (vs. MP previously). Risks to our call include: (i) higher- than-expected service revenue growth, (ii) lower-than-expected OPEX, and (iii) less aggressive competition.

Source: Kenanga Research - 18 Feb 2019