9MFY19 core earnings of RM1.16b (-23%) came within expectations but the interim dividend of 5.0 sen was higher than anticipated. Near-term outlook will be held back by soft prepaid and postpaid performance, but efforts to fuel its convergence strategies till 2023 could paint a more vibrant future. Maintain UP and DCF-driven TP of RM4.90 (based on a WACC: 8.8%, TG: 1.5%).

9MFY19 within. 9MFY19 core earnings of RM1.16b came in within both our and consensus expectations, accounting for 74% and 72% of respective full-year estimates. An interim dividend of 5.0 sen (YTD: 15 sen) was declared, which we deem to be above our 17.0 sen anticipated total payment for FY19.

YoY, 9MFY19 revenue was flattish at RM6.72b but total service revenue came down to RM5.82b (-3%). This came from the continual decline in both Prepaid (-7%) and Postpaid (-2%) sales. While Prepaid ARPU (3QFY19: RM41/sub, vs.. 3QFY18: RM42/sub) was stable, Postpaid ARPU was softer (3QFY19: RM90/sub, vs 3QFY18: RM95/sub). This came from the migration of Prepaid customers to more budget-friendly Postpaid plans. Normalised EBITDA declined by 7% from opex incurred post-termination of past wholesale agreements, coinciding with the lower top-line. Subsequently, 9MFY19 core earnings registered at RM1.16b (-23%) after incurring higher depreciation, interest and tax charges.

QoQ, 3QFY19 service revenue grew slightly (+2%) from a growth in total effective subscribers, stemming from the Postpaid segment. However, 3QFY19 reported lower core net profit of RM361.0m (-8%) mainly from higher depreciation recorded during the quarter.

Laying the bricks. MAXIS works to be the pioneer in many ventures ahead of the competitors. Recall that the group struck a 5G provisioning agreement with Huawei in early October, the first of such arrangements in the country. Future-proofing its business model, the group sticks to its long-term convergence growth strategies to be the leading converged communications provider by 2023 with provision of media and entertainment content to families. Recall that the group had expanded on its fixed-line bundle offerings with Astro in Aug 2019 to develop this vision. Alongside other investments in network and enterprise offerings, MAXIS hopes to achieve its service revenue target of RM10.0b/year and productivity gains of RM1.0b. In addition to this, the group is also focused in growing its enterprise business

Post-results, our FY19E/FY20E earnings are tweaked by +1.0%/-0.2% following 3QFY19 statistic updates. However, we raise our dividend expectations to 19.0sen from 17.0sen for both FY19E/FY20E.

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 in the market by fundamentally stronger peers (i.e. DIGI with stronger margins, dividend yield and ROE). Additionally, merger talks are also marshalling 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 - 29 Oct 2019