MAXIS’s 1QFY24 results tracked expectations as core profit expanded by an encouraging 9% YoY on the back of healthy growth across the postpaid, enterprise and consumer fiber segments. This more than offset weakness at the prepaid segment as competition weighed on ARPU. We maintain our forecasts, TP of RM5.30 and OUTPERFORM call.

Well within expectations. MAXIS’s 1QFY24 core net profit of RM355m was within our expectations and consensus, at 27% of our full-year forecast and 26% of the full-year consensus estimate. It declared DPS of 4 sen in 1QFY24 (1QFY23: 4 sen), which is within our expectation.

Improvements across the board except for prepaid. 1QFY24 service revenue growth (+3.7% YoY) was largely on track with MAXIS’s full-year guidance (low-single digit growth). Similar to the past four quarters, it was primarily propelled by the postpaid segment on the back of subscriber base expansion (YoY net adds: +254k). This emanated from the mix of internal pre-to-postpaid migration, organic growth and gains from competitors. We believe this was largely driven by the sustained popularity of MAXIS’s new entry level Hotlink postpaid plans, where monthly prices start as low as RM30. Additionally, this may also explain the trend of consecutive QoQ decline in postpaid ARPU since 4QFY22’s peak of RM79.2 (1QFY24: RM75.1).

To a smaller extent, 1QFY24 service revenue was also boosted by stronger segmental performances from: (i) consumer fiber: on the back of continued traction in YoY subscriber net adds (+76k) due to MAXIS’s fixed-mobile convergence proposition, and (ii) enterprise: largely driven by improved demand for managed network services, coupled with contribution from wholesale 4G and 2G services (start: Sept 2023).

Costs well under control. The combination of topline growth and higher 1QFY24 EBITDA margin of 40.1% (1QFY23: 38.7%) enabled EBITDA growth (+6.9% YoY) to soar past MAXIS’s full-year guidance of flattish levels. Hence, this led to core profit expansion of 9% YoY in spite of drag from higher depreciation, interest costs and taxes.

Prepaid competition prevails. Due to competitive headwinds, 1QFY24 prepaid ARPU slipped to RM37.2 (1QFY23: 38.4), as it continued its decline since 4QFY22. On the bright side, YoY prepaid service revenue contraction was partially mitigated by subscriber base expansion (net adds: +85k). Additionally, home connectivity ARPUs inched up YoY to RM110.4 (1QFY23: RM108) amidst snowballing subscribers.

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

1. 5G wholesale access fees invoiced by Digital Nasional Berhad (DNB) amounted to less than RM40m in 1QFY24. This accounts for 11% of total full-year access fees (RM360m) required to purchase a minimum capacity of 1,000 Gbps after DNB reaches 80% population coverage. Nevertheless, the amount is in-line with our projections of circa RM150m-RM170m p.a, assuming the new 5G dual network (DN) does not take effect. Moving forward, MAXIS expects this amount to be the recurring run rate, barring any further expansion of DNB’s network.

2. MAXIS unveiled its refreshed strategy, where it aims to be the market leader in the postpaid and bundled customer segments.

This narrowed focus emphasizes its plans to expand its subscriber base in these target markets.

3. MAXIS plans to continue expanding its fiber network to facilitate the migration of its home fiber customers from TM’s wholesale network. Hence, this would result in a boost to margins and enable MAXIS to compete more effectively on pricing. To recap, as at 1QFY24, MAXIS’ fiber network coverage comprises more than 400k premises passed.

Forecast. Maintained.

Valuations. We also maintain our TP of RM5.30 which is based on unchanged 12xFY24 EV/EBITDA. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to like MAXIS due to: (i) its sustained subscriber net adds in the postpaid segment on the back of its convergence strategy, (ii) its collaboration with Huawei to drive 5.5G commercialization which alludes the potential of developing the most advanced and superior network at this juncture, and (iii) expectation of a ramp-up in enterprise segment earnings as SME customers accelerate take-up of managed services and cloud offerings. Maintain OUTPERFORM.

Risks to our call include: (i) financially unfavourable outcome from implementation of the 5G DN model, (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 additional technology investments and reluctance to transform existing processes.

Source: Kenanga Research - 20 May 2024