Kenanga Research & Investment

Maxis Berhad - Outlook Not Dented by Slight 5G Hiccup

Publish date: Mon, 22 May 2023, 10:13 AM

MAXIS’s 1QFY23 results met expectations. Its reported positive subscriber growth while ARPU was stable. It reiterated guidance for a  flat-to-low single-digit growth for its services revenue in FY23. It does  not believe it will lose out significantly for not having 5G service  immediately given that the 5G service in Malaysia is still at its early  infancy stage. We fine-tune up our FY23F earnings by 4%, raise our  TP by 5% to RM5.30 (from RM5.03) and reiterate our OUTPERFORM  call.

1QFY23 core net profit met expectations at 25% and 23% of our full-year  forecast and the full-year consensus estimate, respectively. It declared a  dividend per share of 4.0 sen, which is on track to meet our full-year  forecast of 16.0 sen.

Results’ highlights. YoY, 1QFY22 revenue improved by 5% driven  largely by service revenue (+6%), with revenue from devices rising 10%  However, net profit grew by a stronger 7% In the absence of Cukai Makmur.

YoY, its mobile subscriber growth was resilient at 3% driven largely by  an 8% growth in post-paid subscribers on positive response to its device  bundled plans, converged propositions for homes and entry level plans. Both its pre-paid and post-paid ARPUs remained stable.

Its home internet revenue grew 11% underpinned by a 12% growth in  subscribers but at a stable ARPU of RM108. Its B2B revenue saw a 5%  uptick driven by high-margin products & services.

QoQ, 1QFY23 revenue eased 1% due to a seasonally lower revenue  from devices. However, EBIT improved 4% on lower marketing cost (vs.  higher spending on year-end promotions in the preceding quarter. Its  core net profit surged 33% in the absence of Cukai Makmur.

Its pre-paid subscribers contracted by 2% following the scheduled cleanup of inactive SIM cards.

The key takeaways from its results’ briefing are as follows:

1. MAXIS reiterated its guidance for a flat-to-low single-digit growth for  its service revenue in FY23, with EBITDA and capex at levels similar to those of FY22 (excluding impact from the roll-out of the 5G  service), i.e. RM4b and RM1.5b, respectively.

2. Pending the roll-out of the second 5G network, MAXIS will lease its  5G network from Digital Nasional Bhd (DNB), the owner of the first  5G network in Malaysia. We understand that the negotiation on the  leasing of the 5G network is still on-going at present and MAXIS has  yet to decide on the launch date of its 5G service. Meantime,  negotiations are also underway between all mobile network  operators (MNOs) on the formation of Entity A (the consortium that  will own and operate the first 5G network and Entity B (the entity that  will own and operate the second 5G network).

3. Maxis does not believe it will lose out significantly for not having 5G  service immediately given: (i) that the 5G service in Malaysia is still  at its infancy in Malaysia at present, and (ii) the strong brand loyalty  among its premium customers.

4. Its B2B segment is now a bread-and-butter business. It is still  reviewing this product portfolio with the emphasis on products that  fetch higher demand and better margins.

Forecasts. We fine-tune up our FY23F earnings by 4% on account of lower leasing cost.

We raise our TP by 5% to RM5.30 (from RM5.03) as we roll forward our valuation base year to FY24F (from FY23F). Our valuation  basis is unchanged at 12x EV/EBITDA, which is still at a discount to the sector’s historical average of 13x to reflect the risk of the  government back pedalling on the dual wholesale network model for the 5G rollout. There is no adjustment to our TP based on  ESG given a 3-star rating as appraised by us (see Page 4).

Positive momentum to continue. We believe MAXIS’s positive earnings momentum will sustain into FY23 underpinned by: (i)  its expanded 4G coverage, (ii) its 5G rollout, and (iii) the full-year impact of the reopening of the economy, and iv) brand loyalty  from its premium customers. Given the attractive bundling of home internet and mobile services, we are positive on its home  internet gaining momentum further. With the risks of higher inflation abating coupled with business activities moving again, B2B  revenue will continue to be resilient as both corporates and SMEs continue to upgrade their digitalization. Its margins are likely to  improve on account of higher-end products and services being offered. Maintain OUTPERFORM.

Risks to our call include: (i) the government back pedalling on the dual wholesale network for the 5G rollout, (ii) lower B2B  spending on a sharp slowdown in the economy, (iii) a prolonged gestation period for 5G services, and (iv) irrational competition  between players

Source: Kenanga Research - 22 May 2023

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