INVESTMENT HIGHLIGHTS

• Higher costs led to -50.0%yoy reduction in 4QFY18 normalised earnings

• This lead to weaker-than-expected full year FY18 earnings of RM1,767m (-14.7%yoy)

• Experiencing earnings pressure in absence of income from U Mobile and gestation period for its new business focus

• Downgrade to SELL with a revised target price of RM4.73

4QFY18 earnings impacted by higher costs. Maxis’ 4QFY18 normalised earnings came in at RM259m, a decrease of -50.0%yoy. The sharp decline in the normalised earnings was mainly due to higher expenses which include: i) investment in the launch of “Fibrenation” campaign, which includes fibre customer retention initiatives, ii) mobilisation of Enterprise business growth opportunities, iii) network improvement and optimisation to maintain an unmatched customer experience and, iv) increased operation and maintenance expenses from investment for productivity programme.

Failed to kept pace with expectation. Due to the weaker 4QFY18 results, full year FY18 normalised earnings amounted to RM1,767m. This translates into a contraction of -14.7%yoy, despite a -2.4%yoy decline in group revenue. All in, the group’s FY18 financial performance came in below ours and consensus expectations, accounting for 87.7% and 90.8% of full year FY18 earnings estimates respectively.

Continuous growth in postpaid. 4Q18 postpaid revenue increased by +5.9%yoy to RM1,053m. This was premised on higher postpaid subscriber base of 3,135k (+9.9%yoy). Hotlink postpaid flex and Zerolution 360 continues to be strong catalysts driving incremental port-ins of entry-level Postpaid subscribers. Note that inclusive of this quarter, the Postpaid subscriber base has been expanding steadily for the past ten quarters since 3Q16. Meanwhile, Postpaid ARPU remained resilient at RM94 per month.

Prepaid revenue continues to trend lower. As expected, prepaid revenue continue to decline, albeit slower pace. For the quarter-inreview, the prepaid revenue contracted by -6.4%yoy to RM845m. This was mainly affected lower prepaid subscriber base of 6,610k (- 5.5%yoy) due to continued SIM consolidation, pre to post conversion and price competition.

Dividend. The group declared 4Q18 dividend of 5sen per share. This led to full year FY18 dividend of 20sen per share, in-line with our expectation.

Capital expenditure (capex). 4QFY18 capex rose significantly to RM524m, an increase of +37.2%yoy. This was mainly due to additional investment in network capacity to support strong data traffic growth, investment in Home Fibre and Enterprise growth.

Impact. In light of the weaker-than-expected FY18 reported earnings, we are revising lower FY19 earnings forecasts by -18.7%. We are inputting lower profit margin of 18.3% as compared to 23.5% previously.

Target price. We are revising our target price to RM4.73 (previously RM5.67). This is based on pegging unchanged forward PER of 22.5x to FY19F EPS of 21.0sen. Our target PER is the stock’s average low PER of the group over the past four years.

Downgrade to SELL. We view that the diminishing income from U Mobile has greatly affected the group’s profit margin and, subsequently, earnings. This is further impacted by the notable repricing of Home Fibre offerings. To regain the loss in revenue, the group is repositioning itself to become an ICT market leader. This would include aggressively growing the enterprise business segment. However, we view that there are gestation period before it could substitute the loss of sizeable income from U Mobile. Coupled with competition from its peers, we do not expect the group to be able to offset the loss of contribution from Umobile organically in the near term. Meanwhile, we expect the Maxis’ dividend yield to remain below 4% to meet to focus on executing its new strategy. All factors considered, we are downgrading our recommendation to SELL from neutral previously.

Source: MIDF Research - 18 Feb 2019