INVESTMENT HIGHLIGHTS

• Higher 4Q16 normalised earnings lifted the group’s full year FY16 normalised earnings by +0.6%yoy to RM1,963m

• Both prepaid and postpaid segments recorded lower subscribers while ARPU improved steadily

• A total dividend of 20sen per share declared in 2016

• Maintain NEUTRAL with a revised target price of RM6.58 per share

Better earnings performance. Maxis reported 4Q16 earnings of RM504m. After adjusting for accelerated depreciation (RM21m) and unrealised forex losses (RM18m), the 4Q16 normalised earnings amounted to RM543m, an encouraging increase of +14.3%yoy. The improvement in earnings was driven by higher revenue contribution (+1.7%yoy) and lower indirect expenses (-8.8%yoy).

Meet expectation. For full year 2016, Maxis’ normalised earnings amounted to RM1,963m, a marginal growth of +0.6%yoy. Note that the normalised earnings excludes asset impairment and contract obligation provision reversals (RM71m), unrealised forex gains (RM16m) and accelerated depreciation net of tax (RM37m). Apart from more efficient marketing spend and savings from cost optimisation program, the slight improvement in earnings was supported by resilient revenue contribution from both service and non-service revenue. All in, Maxis’ FY16 financial performance meets ours and consensus expectations, accounting for 101.2% and 103.6% of earnings estimates respectively.

Prepaid. The prepaid revenue for 2016 dropped by -3.7%yoy to RM4,018m. This was impacted by the decline in prepaid subscriber base in view of intense price competition, particularly in the first half of 2016. Meanwhile, prepaid ARPU increased to RM40/mth (2015: RM38/mth), driven by continued traction on mobile internet usage which made up for the decline in voice and SMS.

Postpaid. 2016 postpaid revenue remains resilient at RM3,931m (vs RM3,923m in 2015). This was mainly attributable to higher MaxisOne plan ARPU of RM138/mth, which lifted the average postpaid ARPU to RM102/mth. However, the postpaid subscriber base shrunk by -1.9%yoy to 2,712k subscribers as at 4Q16

Capital expenditure (capex). For 2016, Maxis’ capex stand at RM1,185m. This was -9.1%yoy lower as compared to RM1,304m spent in 2015. The group will continue its investment in capacity and quality enhancement to deliver unmatched network quality.

Dividend. The group declared dividend of 5sen per share in 4Q16, in tandem with 4Q15 dividend. All in, a total dividend of 20sen per share has been declared for 2016.

Impact on earnings. We fine-tune FY17 earnings estimates marginally higher by +0.5% as we reduce the indirect expenses assumptions to better reflect the results thus far.

Target price. Following our revision in FY17 earnings, we are revising our target price marginally higher to RM6.58 per share (previously RM6.55). This is premised on FY17EPS of 26.3sen pegged to forward FY17 PER of 25x which is the average four-quarter rolling PER of the group over the past four years.

Maintain NEUTRAL. We applaud the group’s effort to increase its postpaid and prepaid ARPU. However, we believe that the strategy has negatively impacted the potential growth in the group’s postpaid and prepaid subscriber base. To recall, Maxis’ total subscribers have continued to shrink since 3Q15, albeit slower pace. We are of the opinion that the dwindling subscriber base would place Maxis in a difficult position to meaningfully grow its service revenue and maintain a healthy profit margin. Meanwhile, Maxis’ attractiveness as a dividend play stock has also waned due to the changes in its dividend payout policy. Based on the current dividend policy, we view that dividend yield would come in below 4%. As we do not see plausible re-rating catalysts in the foreseeable period, we maintain our NEUTRAL recommendation.

Source: MIDF Research - 10 Feb 2017