Review

• Maxis achieved a 1QFY17 core profit of RM510mn (-6.1% QoQ, +5.8% YoY). This was within ours and consensus expectations at 27.1% and 27.0%. An unchanged interim dividend of 5.0sen was declared.

• QoQ. It was a well fought quarter with mobile service revenue (-1.7% QoQ) contracting slightly due to seasonally lower roaming revenue. Appearing to have stabilised, postpaid subscribers grew for the second quarter with 22k net adds – driven by the MaxisONE Plan (MOP). Postpaid ARPU was lower at RM101 due to the aforementioned seasonally lower roaming revenue. The prepaid segment, however, remains a concern with its seventh consecutive quarter of net churns (-140k). Lower profits were realised as normalised expenses (+0.8% QoQ) stood flattish.

• YoY. Service revenue was stable. Pursuing a revenue market share strategy, higher blended ARPUs (+4.0% YoY) helped offset a net decrease in total subscribers (-502k). Normalised EBITDA fell 3.3% YoY, as a result of increased costs. Higher normalised expenses were a result of double digit increases in spectrum license fees, operation & maintenance, staff & resources and network costs. However, profits were aided by a lower effective tax rate of 25.4% (-3.7pp).

• Postpaid revenues decreased 0.8% YoY. Total postpaid subscribers reported 43k YoY net churns. After 13 quarters of decline, the trend appears to have reversed in the 4QFY16. Postpaid ARPU was stable from a year ago at RM101. The uptake of MOP remains strong, with 1,788k subscribers and a higher ARPU of RM121. However, MOP ARPU has been moderating from an increase of shared lines (RM48/month).

• In the prepaid segment, service revenue fell marginally by 0.3% YoY. Prepaid subscribers remained on a downtrend, losing 459k subscribers YoY. Not unique to Maxis, we have seen similar declines for Digi and Celcom. This was reportedly attributed to industry consolidation. There is a reduction of multi-sim usage and pre-to-post migration. Prepaid ARPU saw an uplift to RM42 – partly due to increased take up of Hotlink FAST plans. There are currently 1,740k Hotlink FAST users with higher ARPUs of RM44.

Impact

• No changes to our earnings forecasts.

Outlook

• No changes were made to guidance. Service revenue, absolute EBITDA and base capex are guided at similar levels to 2016. Defending its market share, priorities will be centred on core customer propositions, customer experience and maintaining its network quality advantage. Competition is expected to remain intense. We believe this is due to efforts by webe & Celcom to gain/regain market share and a more equitable spectrum portfolio in the second half. However, the group is unlikely to follow in the trend of unlimited packages. Unlimited packages can affect network quality by attracting data heavy users, which may lead to network congestion. It also becomes less relevant given the abundance of data being offered in the market already.
• Net debt/EBITDA stood at 1.96x – near its comfortable threshold of 2.0x. Coupled with a flattish outlook and expectations of further spectrum reviews, we believe dividend upsides will be limited in the near future.

Valuation

• We value Maxis at a TP of RM5.95/share – based on a DCF valuation with WACC at 7.0% and long term growth rate of 1.0%. We maintain our SELL conviction on the group due to its flattish outlook and average dividend yield of 3.1%. Valuation wise, we believe the stock is fairly valued, trading above its historical average EV/EBITDA at 12.8x.

Source: TA Research - 28 Apr 2017