INVESTMENT HIGHLIGHTS

• 1Q19 normalised earnings declined to RM404m (-20.8%yoy), in-line with ours and consensus expectations

• Prepaid consolidation and loss of income following the termination of a network sharing agreement led to the decline in earnings

• Observing gestation period for its new business initiatives

• Maintain SELL with a revised target price of RM4.68

Weaker 1Q19 normalised earnings. Maxis’ 1Q19 normalised earnings reduced by -20.8%yoy to RM404m. This was mainly attributable to: i) lower prepaid RGS, ii) overall reduction in ARPU, iii) termination of a network sharing agreement, and iv) increased in operation and maintenance expenses from investment for productivity programme. All in, 1Q19 financial performance came in line with ours and consensus expectations, accounting for 24.7% and 24.2% of full year FY19 earnings estimates.

Resilient postpaid revenue. The postpaid service revenue grew marginally by +1.5%yoy to RM1,000m. This was mainly driven by the growth in subscriber base to 3,261k (+12.0%yoy). However, the ARPU declined to RM88/mth mainly due to higher take-up rate of Hotlink Postpaid Flex.

Consolidation in prepaid segment. The prepaid service revenue registered a drop of -6.1%yoy to RM797m. This was mainly impacted by lower prepaid subscriber base and weaker prepaid ARPU. Note that the prepaid subscriber base dwindled to 6,467k (-4.7%yoy) in view of pre-to-post conversion and SIM consolidation. Meanwhile, ARPU dropped to RM40/mth from RM41/mth in 1Q18.

Dividend. The group maintained its quarterly dividend payment of 5sen for 1Q19. This is in-line with our full year FY19 dividend of 20sen.

Capital expenditure (capex). 1QFY19 capex increased by +18.7%yoy to RM127m (1Q18: RM107m). This was mainly due to incremental investment for Home Fibre and Enterprise growth. Note that part of the capex was spent on 5G live trials which started in March 2019.

Target price. We roll forward our valuation base year to FY20 and derive a new target price of RM4.68 (previously RM4.73). This is based on lower forward PER of 20.6x (previously 22.5x) to FY20 EPS of 22.7sen. Our target PER is the group’s two years low historical PER. We view the lower target PER reflect the undergoing transformation in the group’s business subsequent to the loss of income from its network sharing agreement.

Maintain 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. To regain the loss in revenue, the group is repositioning itself to become a converged communications and digital services company. This would include aggressively growing the enterprise business segment. However, we view that there are gestation period before it could substitute the loss of 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 focus on executing its new strategy. All factors considered, we are maintaining our SELL recommendation.

Source: MIDF Research - 29 Apr 2019