INVESTMENT HIGHLIGHTS

• 9MFY17 normalised earnings came in as expected, mainly due to growth in postpaid segment and expansion in profit margin

• Higher traction from the postpaid segment premised on higher uptake in MaxisONE Plan

• The prepaid service revenue remain depressed as subscriber base continues to dwindle

• Capital spending expected to pick up pace in 4Q17 after slower 9MFY17 spending

• Maintain NEUTRAL with an unchanged target price of RM5.80 per share

Cost optimisation initiatives showing results. Maxis 3Q17 normalised earnings amounted to RM562m, an increase of +8.7%yoy. This lead to 9MFY17 normalised earnings of RM1,560m (+9.2%yoy). The higher normalised earnings was mainly attributable to higher postpaid service revenue and integrated services. This was further boosted by higher profit margin as a result of effective cost optimisation initiatives. All in, the group’s financial performance was inline with ours and consensus’ expectations, accounting for 79% and 80% of FY17 full year earnings estimates respectively.

Strong momentum on the postpaid segment. 9MFY17 postpaid service revenue improved by +3.4%yoy to RM3,042m. The increase was driven by higher MaxisOne plan subscribers which lifted the overall postpaid subscriber base to 2.8m (+4.7%yoy). Nonetheless, Maxis managed to defend the postpaid ARPU above the RM100 mark.

Prepaid segment remains depressed. 9MFY17 prepaid service revenue declined marginally by -1.2%yoy to RM2,944m. This was mainly attributable to lower prepaid subscriber base of 7.1m (- 10.6%yoy) in view of price-focused competition and sim consolidation. Moving forward, we are expecting the prepaid subscriber base to decline at a slower pace following the reinvigoration of the mobile internet passes towards the end of 3Q17.

Capital expenditure (capex). Maxis’ 9MFY17 capital spending slowed down to RM647m (-12.7%yoy) from RM741m a year ago. This led to lower capex-to-service revenue of 10.1% as compared to 11.8% recorded for 9MFY16. Despite lower FY17 cumulative capex, management maintained its guidance that full year FY17 capex to be similar with that of FY16 (RM1,185m). As such, 4Q17 capex should be significantly higher than 4Q16 capex of RM448m to maintain its leadership in network quality and customer satisfaction (i.e. net promoter score).

Dividend. The group declared 3Q17 dividend of 5sen per share. Cumulatively, the group’s 9MFY17 dividend amounted to 15sen per share. This came in within our and consensus expectations, accounting for both 75% of FY17 full year dividend of 20sen per share.

Target price. We are maintaining our target price of RM5.80 per share. This is premised on pegging target PER of 23x, which is the average low PER of the group over the past four years, against FY18EPS of 25.3sen.

Maintain NEUTRAL. The revamped MaxisONE plan, which offer better value proposition, has continues to show good traction as the postpaid subscriber base continues to increase steadily. This, however, negatively impact the postpaid ARPU as we view that the postpaid subscribers will be incline to sign-up the entry level postpaid plan. On the contrary, prepaid ARPU continue to grow at a steady pace as Hotlink Fast subscribers increase their data usage. Nonetheless, due to intense competition, the prepaid subscriber base continues to dwindle. In 2HFY17, we view that it would be difficult for Maxis to grow the prepaid revenue as we expect Webe to disrupt the prepaid market. Meanwhile, we expect the Maxis’ dividend yield to remain below 4% to meet its capital commitment and prepare for the upcoming spectrum reallocation exercise. All factors considered, we are keeping our NEUTRAL recommendation unchanged at this juncture.

Source: MIDF Research - 26 Oct 2017