Review

• Maxis reported 3QFY19 core net profit of RM361mn (-7.7% QoQ, - 30.3% YoY). This brought 9MFY19’s core net profit to RM1,156mn (- 23.3%) which came within ours and consensus estimates at 72.8% and 71.8% respectively. Meanwhile, the group declared a 3rd interim dividend of 5.0sen/share; YTD dividends of 15.0sen/share are unchanged from the previous corresponding period.

• Generally, Maxis’ weak 9MFY19 results was mainly due to the decline in wholesale revenue following the scheduled termination of its 3G radio access network (RAN) sharing alliance agreement with U Mobile towards 30 June 2019. On a brighter note, the group’s core business was intact with service revenue excluding wholesale revenue resilient at RM5,683mn (+0.1%) as traction from both the postpaid and fibre broadband segments offset the prepaid segment’s weakness. Also encouraging, 3QFY19 marked the 2nd consecutive quarter in which Maxis’ service revenue excluding wholesale revenue grew on a QoQ basis, albeit by low-single digit. This was largely driven by sustained traction from its postpaid and fibre broadband segments which we expect to continue into 4QFY19.

• YoY. 9MFY19’s service revenue and normalised EBITDA declined 3.6% and 6.8% to RM5,805mn and RM2,864mn – in line with management’s guidance for service revenue and normalised EBITDA to decline by lowsingle digit and mid-single digit respectively. This was mainly due to the decline in wholesale revenue for the aforementioned reason and with its impact to the top line largely flowing to the bottom line, EBITDA margins narrowed 2.9pp to 42.1%. To recap, contributions from the 3G RAN accounted for 3% of FY15 and FY16’s revenue or ~RM258mn.

• QoQ. 3QFY19’s core net profit declined 7.7% to RM361mn mainly due to higher depreciation corresponding to the higher capex spent. Service revenue and EBITDA however grew 1.1% and 0.5% to RM1,940mn and RM945mn, driven by growth across all segments i.e., postpaid, prepaid, fibre broadband, and enterprise. Of note, the group continued to see encouraging response to its converged offering e.g., MaxisONE Prime (a postpaid and fibre broadband bundle) with sustained subscriber acquisition momentum at the postpaid (+143k) and fibre broadband (+34k) segments. Meanwhile, subscriber movements within the prepaid segment was largely intact with net churns of only 2k.

• In terms of ARPU, postpaid ARPU at RM85/month was lower 1.2% QoQ and 8.6% YoY due to a higher mix on entry level plans while prepaid ARPU at RM35/month was unchanged QoQ but down 2.8% YoY due to the reduction in mobile termination rates. As for home fibre broadband, ARPU at RM108/month was higher 1.9% QoQ due to increased take up of higher speed plans (e.g., 100Mbps & 300Mbps) while lower 22.3% YoY due to the implementation of the MSAP last year.

Impact

• We have reduced our FY19/FY20/FY21 earnings by 6.1%/8.5%/7.3% upon performing housekeeping to our model with depreciation charge raised to be in tune 3QFY19’s.

Outlook

• For FY19, management reiterated its guidance for service revenue to decline by low-single digit (versus mid-single digit decline in FY18) and normalised EBITDA to decline by mid-single digit (versus high-single digit decline in FY18). This is mainly due to the decline in wholesale revenue as observed from the beginning of the year. Meanwhile, CAPEX guidance was maintained with core network CAPEX at ~RM1.0bn (unchanged from FY18) and growth CAPEX at ~RM1.0bn over 3 years while operating free cash flow was also maintained to be in line with FY18’s.

• Management remains focused on executing its 5-year (2018-2023) strategy which aims to transform Maxis from a ‘consumer and mobilecentric telco’ to ‘Malaysia’s leading converged communications and digital services company’. This involves capturing opportunities from enterprises via the offering of converged solutions in underpenetrated areas such as fixed connectivity, managed services, cloud services, and IoT solutions which combined is an addressable ICT market with an estimated market size of RM20bn to RM25bn. Internal targets are for service revenue to exceed RM10bn (FY18: RM8.1bn) by 2023.

• While we are encouraged by management’s efforts, we estimate lowsingle digit service revenue growth of 0.9%/1.0% in FY20/FY21 until meaningful traction is evident. Furthermore, while Maxis’ leadership in mobile connectivity would support its ambitions, we note that the group could face increasing competition from peers like Celcom and Digi which are on a similar bandwagon to capture growth from enterprises as well as via converged solutions.

Valuation & Recommendation

• In all, we maintain our Sell recommendation on Maxis with a slightly higher TP of RM4.80/share (previously RM4.75/share) based on DCF valuation with a WACC of 7.6% and LT growth rate of 1.0%.

• Our bearish stance on the stock is premised on the group’s subdued earnings prospects in the near-term and unexciting forward dividend yields of 3.7% across FY19-FY21. Upside risks include strong traction with the group’s new 5-year strategy. While downside risks include heightened price competition and regulatory changes.

Source: TA Research - 29 Oct 2019