INVESTMENT HIGHLIGHTS

• Maxis’ 1Q17 normalised earnings grew steadily at +6%yoy to RM510m

• Earnings improvement was mainly attributable to lower depreciation while revenue remains relatively stable

• Dividend of 5sen per share declared in 1Q17

• Maintain NEUTRAL with a revised target price of RM6.65 per share

Steady earnings growth momentum. Maxis reported 1Q17 earnings of RM505m. After adjusting for unrealised forex losses of RM5m, the normalised earnings amounted to RM510m. This represents an increase of +5.8%yoy. The improvement in earnings was mainly driven by lower depreciation charges (-7.7%yoy). Meanwhile, the group’s revenue remain resilient at RM2,157m.

No surprises. All in, the group’s 1Q17 financial performance came in within our and consensus expectations, accounting for 25.8% and 27.0% of full year FY17 earnings estimates respectively.

Prepaid. 1Q17 prepaid revenue decreased marginally by -0.3%yoy to RM1,005m. The revenue was negatively impacted by dwindling prepaid subscriber base as low value customer ported out. Fortunately, the prepaid ARPU persists at RM42/mth due to higher take-up rate in the Hotlink FAST plan which commands a higher ARPU of RM44/mth. Intandem, the smartphone penetration has improved to 77% from 67% as at 1Q16.

Postpaid. The postpaid revenue for 1Q17 remains relatively stable at RM989m. This was supported by a steady growth in postpaid subscriber to 2,744k (+1.8%yoy) as MaxisONE plan take-up rate remains encouraging. Meanwhile, the postpaid ARPU remains at RM102m from a year ago. The average data usage for postpaid users has increased significantly to 6.2gb/mth from 1.9gb/mth as at 1Q16. We view that this could be mainly attributable to the upgrade in Maxis ONE plan in 4Q16.

Capital expenditure (capex). In 1Q17, Maxis’ capex stands at RM162m, a slight increase of +1.9%yoy. The capex was mainly spent on maintaining its network quality. Note that Maxis has a marketleading 4G LTE network.

Dividend. The group declared 1Q17 dividend of 5sen per share, in-tandem with 1Q16 dividend. This came in within our expectations, accounting for 25% of FY17 full year dividend of 20sen per share.

Target price. We are rolling forward our valuation base year to FY8 and derive a new target price of RM6.65 per share (previously RM6.58 per share). This is premised on FY18EPS of 26.6sen pegged to forward FY18 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 retain 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. 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 far below 4%. As we do not see plausible re-rating catalysts in the foreseeable period, we maintain our NEUTRAL recommendation.

Source: MIDF Research - 28 Apr 2017