MAXIS’s 1HFY24 results tracked expectations on the back of tight cost controls. Despite growth in areas such as enterprise solutions, we believe that MAXIS's premium valuations may be eroded. This considers its smaller scale in a mature and competitive market, where its main competitor has recently gained traction in realizing merger synergies. We maintain our forecasts, but cut our TP by 29% to RM3.74 (from RM5.30) and downgrade our recommendation to MARKET PERFORM from OUTPERFORM. A re-rating catalyst could be earlier-than-expected monetization of 5G from enterprises.

Tracked expectations. MAXIS’s 1HFY24 core net profit of RM720m was in-line with our expectation and consensus – at 55% of our full- year forecast, and 53% of the full year consensus estimate. It declared 2QFY24 DPS of 4 sen (2QFY23: 4 sen), bringing 1HFY24 DPS to 8 sen (1HFY23: 8 sen), which was within our expectation.

Costs mostly contained. 1HFY24 service revenue expansion (+1.1% YoY) tracked MAXIS’ full-year guidance (low-single digit growth). The expansion was primarily driven by: (i) consumer postpaid: due to an enlarged subscriber base as 2QFY24 net adds inched up to 73k (1QFY24: 53k), and (ii) enterprise fixed & solutions: largely propelled by the provision of 4G MOCN (multi-operator core network) and 2G domestic roaming services to TM.

In addition, enterprise revenues were uplifted by higher project deliveries forfixed and solutions, which include provision of fixed connectivity services for “most, if not all” data centers (DC) nationwide.

To a lesser extent, MAXIS’ 1HFY24 topline was boosted by the consumer fiber segment as subscribers continued to snowball with QoQ net adds of 13k in 2QFY24 (1QFY24: 13k).

The flow through from stronger topline, coupled with a largely stable cost base led to the 5% and 9% YoY expansion in 1HFY24 EBITDA and core net profit, respectively.

Largely resilient ARPUs. The slight QoQ weakness in ARPUs for postpaid and home connectivity correspond to MAXIS’ prevailing strategies, which include: (i) promotion of convergence plans and (ii) push for postpaid pre-to-post migration. On the bright side, in spite of competitive headwinds, the prepaid segment saw a net addition of 45k subs in 2QFY24 (1QFY24:104k net loss) amidst flattish ARPU.

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

1. 5G wholesale access fees invoiced by Digital Nasional Berhad (DNB) in 2QFY24 remained largely stable QoQ. To recap, MAXIS revealed that 1QFY24 fees amounted to c.RM40m. Looking ahead, MAXIS does not expect a significant uptick in these fees for 3QFY24. Based on these trends, and assuming the new 5G dual network (DN) does not take effect, we expect total fees for FY24 to align with our projections of c.RM150m-RM170m p.a.

2. We understand that the bid submitted by MAXIS to develop the second 5G network is solely for acquisition of spectrum rights (i.e.700MHz, 3.5GHz, and 26/28 GHz mmWave bands). The tender is conducted as a beauty contest, with the outcome targeted by 3QCY24. The evaluation will take into consideration the requirement for 5G traffic to be evenly distributed between the dual networks in Malaysia.

3. MAXIS revised its EBIT guidance higher to “marginal-to-low single digit growth” from “remain relatively unchanged to FY23”. Its YTD EBIT growth of 7.5% YoY exceeds this refreshed guidance, but is in-line with our forecast of 7.4% YoY expansion.

4. MAXIS will offer GPU-as-a-service to its Malaysian enterprise customers via a partnership with Singtel. This offering will be powered by Nvidia H100 Tensor Core GPU-powered clusters that operate at Singtel’s DCs in Singapore. Moving forward, if demand is strong, MAXIS may consider hosting this service in Klang Valley in collaboration with other partners.

Forecast. Maintained.

Valuations. We downgrade our valuation of MAXIS to 8.3x FY25 EV/EBITDA (from 12x), in-line with the 4-year historical average for Malaysian-listed mobile players.We removed its previously assigned premium, given that its most formidable peer, CDB, has recentlygained momentum on its merger synergies. Over the medium-to-long term, we anticipate that MAXIS may soon lag behind CDB, which is aggressively advancing its plans to achieve RM8b in NPV from merger synergies. As of 2QFY24, CDB has already realized RM700m in net synergies, positioning it well on track to meet its 5-year target by 2027. CDB's better economies of scale are reflected in its higher EBIT margin, which is projected to exceed MAXIS by 2.2 ppts in FY25. As a result, our TP on MAXIS is lowered by 29% to RM3.74 (from RM5.30) and we downgrade our recommendation to MARKET PERFORM from OUTPERFORM.

Risks to our call include: (i) competition between mobile players turn irrational, (ii) loss of competitive edge due to excessive cut in resources from cost optimization initiatives, and (iii) enterprise customers slow to adopt 5G due to additional technology investments and reluctance to transform existing processes.

Source: Kenanga Research - 22 Aug 2024