1H19 core earnings of RM795.0m (-20%) and interim dividend of 5.0 sen are within expectations. MAXIS remains steadfast with its plan to be a prominent convergence player by 2023. However, near-term performance is bogged down by lower overall service revenue in both prepaid and postpaid segments, which could persist for the remainder of FY19. Maintain UP and DCF-driven TP of RM4.90 (based on a WACC: 8.8%, TG: 1.5%).

1H19 as expected. 1H19 core earnings of RM795.0m came in within both our and consensus expectations, accounting for 50% and 49% of respective full-year estimates. An interim dividend of 5.0 sen (YTD: 10.0 sen) was declared, which is also within our expectation. We anticipate a total payment of 17.0 sen for FY19.

YoY, weaker 1H19 total turnover of RM4.44b (-1%) came from a decline in service revenue by 3% to RM3.87b. This was the result of weaker prepaid (-7%) and postpaid (-4%) revenues. While registering somewhat stable ARPU (2Q19 Prepaid-ARPU: RM41/subscriber, vs 2Q18 Prepaid-ARPU: RM42/subscriber), Prepaid numbers were softened by a higher customer conversion to Postpaid. At the meantime, Postpaid was dampened by customers skewing towards more budget-friendly plans (2Q19 Postpaid-ARPU: RM91/subscriber vs 2Q18 Postpaid-ARPU: RM96/subscriber). Normalised EBITDA fell by 6%, owing to the lower top-line and opex post-termination of past wholesale agreements. Subsequently, 1H19 core net earnings closed at RM795.0m (-20%) after incurring higher depreciation, interest and tax charges.

QoQ, 2Q19 revenue saw a similar flattish decline, mainly stemming from poorer Postpaid revenue (-3%). Likewise to the above, a growth in subscriber base (+3%) was undermined by lower ARPU. Ultimately, 2Q19 core net income of RM391.0m was weaker by 3%, as a relatively stable cost environment was hampered by a higher effective tax rate of 26.3% (+1.5ppt) during the period.

Farsighted plans. MAXIS is staying with its 2023 plans to achieve a targeted service revenue of RM10.0b while introducing productivity gains of RM1.0b by being a leading converged communications provider. This will be fuelled by a base investment of RM1.0b over the next 3 years. Management, however, pointed out that this would not account for changes in spectrum charges in the future. Other ambitions also include expanding the group’s enterprise business, by engaging in partnerships with other corporations to launch new solutions and technologies. At least in the immediate term, management keeps with its guidance that: (i) service revenue would experience a low-single digit decline, and (ii) normalized EBITDA to register a mid-single digit drop.

Post-results, our FY19E/FY20E earnings are tweaked by -0.3%/ +0.2% following 2Q19 statistical updates.

Maintain UNDERPERFORM and DCF-driven TP of RM4.90. Our target price (based on WACC: 8.8%, TG: 1.5%) implies a 12.0x FY20E EV/Fwd. EBITDA, which is close to the stock’s -1SD over its 3-year mean. While the group continues to keep a focused approach with its capex plans and investments, the group is sidelined by fundamentally better peers (i.e. DIGI with stronger margins, dividend yields and ROE). Additionally, merger talks are driving investors’ interests towards other players.

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 - 5 Aug 2019