Review

• Maxis announced a FY16 core net profit of RM1,963mn (+14.3% QoQ, +0.6% YoY). Albeit at the higher end, results were within ours and consensus expectations at 104.8% and 103.6%. A fourth interim dividend of 5.0sen (YTD: 20sen) was declared, unchanged from the previous year.

• QoQ. Ending the year on a strong note, mobile service revenue (+2.3% QoQ) increased for the second consecutive quarter. Blended ARPU rose to RM52 (+4.0% QoQ) – lifted by mobile internet and roaming revenue. Postpaid subscribers have stabilised (after 13 consecutive QoQ declines), reporting 5k in net adds. However, prepaid subscribers remained on a downtrend with net churns of 125k individuals. Normalised EBITDA margins improved 0.7pp due to more efficient marketing spend (-13.0% QoQ).

• YoY. Service revenue stood flat at RM8.5bn. A fall in mobile service revenue (-1.8% YoY), was offset by EntFixed (+13.0% YoY) and IntServices (+28.7% YoY) revenues. Prepaid revenue fell 3.7% YoY, as intense competition led to net churns of 607k prepaid subscribers. Partly offsetting this, prepaid ARPU increased to RM37 (+5.7% YoY). This was aided by take up of Hotlink FAST plans (4Q2016: 1.5mn users), with FAST mobile internet users reporting 20% higher ARPU as compared to its legacy base. Prepaid data usage more than doubled to 3.3GB/month.

• Postpaid revenues performed better. Similar to its prepaid segment, a decline in postpaid subscribers (-161k individuals) were offset by higher postpaid ARPU. Postpaid ARPU increased to RM104, driven by MaxisONE Plan (MOP) subscribers. Its MOP subscriber base has doubled to 1.7mn subscribers, with higher ARPUs of RM127 (22.1% premium). In November 2016, MOP were once again upgraded with increased data allocations. While down trading remains a concern for us, management alluded that it has become more manageable.

• On better cost management initiatives, normalised EBITDA margins improved 0.7pp to 52.1%. Sales and marketing expenses decreased 4.2% YoY, with the rollout of more targeted ads and a shift from traditional to digital advertising mediums.

Impact

• Adjusting for year-end numbers and increasing our postpaid revenue and depreciation expenses assumptions, we tweak our FY17/FY18 earnings by 1.7/-1.0% to RM1,885mn/RM1,911mn. We also introduce our FY19 earnings of RM1,948mn.

Outlook

• Guidance for 2017 was revealed. Little changed, service revenue, absolute EBITDA and base capex were guided at similar levels to FY16. Priorities will be focused on core customer propositions, customer experience and maintaining its network quality advantage. We remain wary of competition moving into 2017. We believe it will remain intense,

premised on efforts by webe and Celcom to gain/regain market share, coupled with a more equitable spectrum portfolio in the 2H2017. As the MOP remains priced at a premium, we also do not discount further potential subscriber loss and ARPU pressure from downtrading.

• Its Net debt/EBITDA currently stands at 1.9x – close to its comfortable threshold of 2.0x. Given the flattish outlook and further spectrum reviews around the corner, we believe there are limited upsides to dividends in the near future.

Valuation

• We raise our TP for Maxis to RM5.95/share – based on a DCF valuation with WACC at 7.0% and long term growth rate of 1.0%. Nonetheless, we remain negative on the stock, premised on limited growth opportunities and dividend upsides. Key risks include: 1) Ability to maintain premium pricing; 2) Further spectrum reviews and 3) Leveraged position with Net debt/EBITDA at 1.9x. We believe the stock is fairly valued, as at 12.6x EV/EBITDA it trades slightly above its historical average of 12.1x. SELL.

Source: TA Research - 10 Feb 2017