1Q19 results came in within expectations. Maxis is maintaining its FY19 guidance and aim to transform itself from a consumer & mobile-centric telco into a converged player by 2023. Post review, we have tweaked our FY19-20E numbers marginally. Reiterated UP call with an unchanged DCF-derived TP of RM4.90 (implied -1.0SD EV/FY20E EBITDA below its 5- year mean, in view of its challenging near-term outlook).

In-line. 1Q19 core PATAMI of RM404m (-21% YoY) came in within expectations at 25%/24% of our/street’s full-year estimates. The lower YoY performance was mainly due to the termination of a network-sharing agreement and higher OPEX (as a result of incremental investment for Home Fibre and Enterprise growth). As expected, the group has declared a single-tier tax exempt dividend of 5.0 sen, with an ex-date set on 29-May.

YoY, 1Q19 service revenue dipped to RM1.9b (-1.7%) due to lower Prepaid segment’s performance (-6%, on the back of lower subscription base, continued SIM consolidation, migration from Prepaid to Postpaid, and reduced Mobile Termination Rates (MTR)) but partially offset by higher growth in Postpaid (+1.5%, driven by higher subscriber base and incremental port-ins of entry level Postpaid plan) and Home Fibre business (+7%, thanks to innovative bundled offerings). Core EBITDA declined by 6.6% with margin (as a percentage of its service revenue) softening to 48.9% (vs. 51.5%) due mainly to higher OPEX. QoQ, service revenue was lower by 5%, no thanks to the weak revenues from: (i) Prepaid (-5.7%, due to lower subscription base (-143k to 6.4m) and ARPU (reduced MTR), and (ii) Postpaid (-5%, as a result of reduced MTR, and IDD call revenue, despite higher subscriber base (+126k to 3.3m)). Group EBITDA increased by 24% to RM944m with margin (over service revenue) climbing to 48.5% (vs. 37.2% in 4Q18) as a result of absence of one-offs impact. Free cash flows, meanwhile, increased to RM264m (vs. 4Q18:RM217m) as a result of lower capex spend (RM127m vs. RM524m) in 1Q19.

Execute growth strategy plan while maintaining leadership in mobile. Maxis is implementing a significant change in strategic direction with an aim to become the leading converged player by 2023. The group has commenced scaling its business to address opportunities in Enterprise solutions and converged services across all segments. It targets to spend an incremental capex of RM1b over the next 3 years to support this new strategy and achieve 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 suggest that the group’s ICT initiatives could potentially face a longer gestation period.

Maintain FY19 guidance, where Maxis sees 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.

Reiterate UNDERPERFORM rating as the group’s performance in FY19 is likely to be impacted by 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. Post review, we have tweaked our FY19-20E PATAMI by 2%/1% (after fine-tuning our OPEX and depreciation assumptions), respectively, which has resulted in no impact to our TP due to our rounding practices. 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 - 29 Apr 2019