Review

• Maxis’ 1HFY23 net profit of RM650mn (+4.8% YoY) came within ours and consensus full-year estimates at 47.1% and 47.2%, respectively. Earnings growth was lifted by lower taxes following the discontinuation of Cukai Makmur.

• Remaining prudent, Maxis declared a 2nd interim dividend of 4.0sen/share (2QFY22: 5.0sen/share). This brought 1HFY23’s to 8.0sen/share (1HFY22: 10.0sen/share). The lower dividend, in spite of higher earnings, reflects conservative cash management in consideration of potential commitment for 5G and investments in fibre and other investment opportunities. At Maxis’ current share price, our FY23F to FY25F DPS forecast of 16.0sen/share implies a forward yield of 4.0% (consensus: 4.4% to 4.6%).

• YoY. 1HFY23’s service revenue and EBITDA climbed 2.7% YoY and 1.8% YoY to RM4,225mn and RM1,974mn. This was driven by top line growth from both the consumer (+4.7% YoY) and enterprise (+4.5% YoY) businesses. The consumer business was fuelled by sustained subscriber acquisitions across both postpaid and home connectivity, aided by Maxis’ focus on fixed mobile convergence. Meanwhile, the enterprise business was anchored by core connectivity services. At the bottom line, net profit grew 4.8% YoY to RM650mn as lower taxes in the absence of Cukai Makmur outweighed higher amortisation costs from spectrum and software as well as higher finance costs amid higher interest rates.

• QoQ. 2QFY23’s service revenue was unchanged QoQ at RM2,113mn, with resilience anchored by sustained postpaid and home connectivity growth as they offset softness from prepaid and enterprises. However, EBITDA and net profit grew 3.1% QoQ, respectively, to RM1,002mn and RM330mn, mainly due to lower device costs, given lesser device launches and promotions.

• By segment, the postpaid segment’s revenue advanced QoQ for the 6th consecutive quarter, climbing 0.8% QoQ to RM871mn. The segment saw further subscriber net adds (+52k QoQ to 3.4mn) with higher take up of Maxis Postpaid and affordable entry-level Hotlink Postpaid plans. ARPU was relatively stable (-0.6% QoQ to RM78) with a slight dilution caused by a higher mix of entry-level plans.

• As for the prepaid segment, revenue eased 1.5% QoQ to RM651mn with subscriber net churns (-2k QoQ to 5.7mn) and slight ARPU dilution (- 0.5% QoQ to RM38) attributed to the soft prepaid market and focus on high-margin services.

• Meanwhile, the home connectivity segment sustained its uptrend with revenue higher by 3.2% QoQ to RM229mn, mainly on subscriber net adds (+18k QoQ to 706k), while ARPU was stable (-0.2% QoQ to RM108).

• 1HFY23’s CAPEX was lower by 28.2% YoY at RM296mn. The group has exercised prudence on CAPEX as the network capacity requirement stabilises and considers the potential commitment for 5G.

Outlook

• Guidance for FY23 Largely Intact. Management’s guidance for FY23 was largely unchanged, with service revenue to grow by a low single-digit % (previously flat-to-low single-digit %). We remain firm on Maxis’ ability to maintain service revenue resilience underpinned by its convergence strategy, particularly with traction from mobile and fibre/wireless bundles. Meanwhile, guidance for EBITDA and CAPEX was guided to be similar to FY22’s, which were respectively at ~RM3.9bn and ~RM1.1bn. The guidance for flat EBITDA is on expectation for higher marketing costs to defend/gain market share. Note that the guidance is before any potential financing impact for 5G.

• 5G, Awaiting EGM. Maxis will be seeking shareholders’ approval at an extraordinary general meeting next Monday, 14 August 2023 as it intends to execute the Access Agreement with Digital Nasional Bhd (DNB) to gain access to 5G products and services. If approved, management shared that this could see Maxis join peers in offering 5G products and services as early as next week.

• FY23 Commitment for 5G Expected to be Insignificant. To recap, Maxis announced that the group is expected to incur operating expenses of ~RM360mn/annum for the base 5G product. Notwithstanding, we have yet to impute this as the near-term 5G CAPEX/OPEX trajectory remains fluid pending clarity on the transition from the existing Single Wholesale Network (SWN) to Dual Wholesale Network (DWN). Management highlighted that Maxis’ commitment to 5G in FY23 is expected to be insignificant as it will be prorated and depend on DNB’s % 5G population coverage. Furthermore, management also shared that the group is in discussion with the MCMC for a lower commitment which is aligned with peers.

Impact

• We maintain our earnings estimates.

Valuation & Recommendation

• We reiterate our Sell recommendation on Maxis with a TP of RM3.70 based on DCF valuation with a WACC of 8.9% and LT growth rate of 1.0%. Against FY24F, our TP of RM3.70 implies EV/EBITDA of 9.4x and PE of 19.1x.

• In our view, Maxis’ risk-reward potential remains unfavourable, with its near-term 5G CAPEX/OPEX trajectory still fluid, pending clarity on the transition from the existing SWN to DWN. Against this backdrop, we expect the group to remain prudent on dividends in the interim. Our FY23F to FY25F DPS of 16.0sen/share (versus pre-COVID levels of 20.0sen/share) implies forward yields at 4.0% (consensus: 4.4% to 4.6%), which appears unattractive amid the higher interest rate environment.

• Key risks include unfavourable terms for 5G commercialisation, heightened price competition, and regulatory changes.

Source: TA Research - 10 Aug 2023