MAXIS’s 9MFY23 results met our expectations but trailed consensus. Healthy service revenue’s growth more than offset drag from staff compensation under its new cost optimization exercises. Sustained traction in MAXIS’ convergence and up-selling strategy led to strong subscriber net adds in the postpaid and home connectivity segments. We maintain our forecasts, TP of RM5.30 and OUTPERFORM call.

MAXIS’s 9MFY23 core net profit met our expectations at 71% of our full-year forecast but disappointed the market at 69% of the full-year consensus estimate. It declared DPS of 4 sen in 3QFY23, which brings cumulative 9MFY23 DPS to 12 sen, on track to meet our full-year forecast of 17 sen.

Sustained service revenue traction. YTD topline growth (+3%) was mainly driven by higher service revenue at the postpaid, enterprise and fiber segments. Coupled with the absence of Cukai Makmur, this enabled YTD earnings to expand by 0.5%. However, growth was relatively muted due to: (i) lumpy staff costs recognized in 3QFY23, (ii) higher amortization expense for software and spectrum (awarded: 2022), and (iii) increased interest costs following recent rate hikes.

Cost drag from staff compensation. EBITDA margin compression was mainly attributed to: (i) lumpy staff compensation in 3QFY23 as the group undertakes a 3-year program to right-size its workforce, and (ii) reduced government grants due to less fulfilment of Universal Service Provision projects.

Spike in enterprise service revenues. Segmental enterprise revenue spiked by 12% QoQ despite the discontinuation of wholesale voice services. The growth was mainly driven by maiden 1-month contribution from provision of wholesale 4G MOCN, 4G and 2G domestic roaming services to TM. In addition, notable commercial deals secured in 3QFY23 (e.g. dedicated internet bandwidth capacity for a local bank and data centers) also provided a boost.

Net subscriber expansion in high margin segments. There was sustained traction in MAXIS’s strategy to upsell its products and offer fixed-mobile convergence. This led to YoY total subscriber base expansion as net adds for postpaid and home connectivity surpassed net churn for prepaid and WBB (wireless broadband).

Stable prepaid ARPU from active management. Sequentially, prepaid ARPU remained resilient in spite of the introduction of affordable MADANI prepaid packages. This was attributed to effective ARPU management via personalised promotions on Hotlink MU app. Meanwhile, Home Connectivity ARPU inched up whilst postpaid ARPU were weaker. We believe the latter was due to drag from new users on the affordable entry level Hotlink Postpaid plans.

Key takeaways from MAXIS’ results’ briefing are as follows:

1. MAXIS maintained its FY23 guidance of low single-digit service revenue growth (YTD: +4.2%) and flat EBITDA (YTD: -1.6%). However, the group lowered its capex (YTD: RM511m) guidance to slightly less than RM1b (from RM1.1b). This is on the back of:(i) stabilized network requirements post-completion of the 3G sunset exercise in early CY22, and (ii) MAXIS opting to be conservative in light of upcoming regulatory changes in the 5G space.

2. MAXIS targets to trim its manpower resources by 10% under its newly introduced cost optimization exercise. In particular, 50% of total workforce that were released in 3QFY23 comprised of staff at the enterprise segment. Moving forward, over the next two years, lumpy staff compensation will likely recur on annual basis. Nevertheless, MAXIS does not expect to incur this cost for the remainder of the year in 4QFY23.

3. Moving forward, after low hanging cost fruits (e.g. staff right-sizing) are harvested, MAXIS plans to adopt increased automation and digitalization to achieve further cost savings.

4. Since executing the access agreement with DNB (Digital Nasional Berhad) in August, MAXIS has recognized marginal (less than RM10m) operating expenses from procurement of wholesale 5G capacity. Meanwhile, MAXIS is reviewing a fresh invoice it had recently received from DNB.

Forecasts. Maintained.

We also maintain our TP of RM5.30 which is based on 12xFY24 EV/EBITDA. It implies a discount to the sector’s historical average of 13x to reflect regulatory uncertainty surrounding the implementation of the new Dual Wholesale Network (DWN) model. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We continue to like MAXIS due to: (i) its sustained subscriber net adds in the high margin postpaid segment on the back of upselling and its convergence strategy, (ii) its 3-year cost optimization exercise that may potentially uplift margins, and (iii) expectation of a ramp-up in 5G monetization as enterprise customers intensify digitalization measures. Maintain OUTPERFORM.

Risks to our call include: (i) unfavourable outcome from implementation of DWN, (ii) loss of competitive edge due to excessive cut in resources from cost optimization, and (iii) enterprise customers are slow to upgrade to 5G due to hefty technology investments.

Source: Kenanga Research - 14 Nov 2023