Review

• Maxis’ 9MFY23 net profit of RM937mn (+2.0% YoY) came below ours and consensus full-year estimates at 67.8% and 68.9%, respectively. On our end, the disappointment was due to higher-than-expected expenses with a surprise from restructuring charges related to cost optimisation initiatives to improve operational efficiency. Lower taxes lifted 9MFY23’s earnings growth in the absence of Cukai Makmur.

• Remaining prudent, Maxis declared a 3rd interim dividend of 4.0sen (3QFY22: 5.0sen). This brought 9MFY23’s to 12.0sen (9MFY22: 15.0sen). Despite improved earnings, the lower dividend 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 implied forward yield at 4.0% (consensus: 4.4% to 4.6%).

• YoY. 9MFY23’s service revenue advanced 4.2% YoY to RM6,370mn, anchored by both the consumer (+4.0% YoY) and enterprise (+5.1% YoY) businesses. The consumer business was driven by continued subscriber acquisitions across both postpaid and home connectivity, supported by the various promotions of fixed-mobile convergence. On the other hand, the enterprise business was fuelled by higher enterprise mobile, wholesale arrangements, and core connectivity-related solutions. Despite top-line growth, PBT fell 9.2% YoY to RM1,266mn, dragged by restructuring charges related to cost optimisation initiatives, lower Universal Service Provision (USP) income due to lesser USP project fulfilment, higher amortisation costs from spectrum and software, and higher finance costs amid higher interest rates. However, thanks to the absence of Cukai Markmur, net profit recovered 2.0% YoY to RM937mn.

• QoQ. 3QFY23’s service revenue grew 1.5% QoQ to RM2,145mn, driven by both the consumer (+0.8% QoQ) and enterprise (+5.0% QoQ) businesses. However, EBITDA and net profit contracted 7.3% QoQ and 13.0% QoQ to RM929mn and RM287mn, mainly due to restructuring charges related to cost optimisation initiatives and lower USP projects fulfilled.

• By segment, the postpaid segment’s revenue advanced QoQ for the 7th consecutive quarter as it expanded 1.3% QoQ to RM882mn. The segment sustained net adds (+84k QoQ to 3.5mn) with take-up from both premium and value-seeking customers, aided by the group’s pre-to-post migration strategy. ARPU was resilient (-1.4% QoQ to RM77), with its slight dilution caused by a higher mix of entry-level plans.

• The prepaid segment was stable, with revenue marginally higher, 0.2% QoQ to RM652mn. This was attributed to personalised promotions via the HotlinkMU app and the launch of a new prepaid plan targeted to the youth segment with attractive cashback offers, which kept both subscriptions and ARPU (almost unchanged QoQ at 5.7mn and RM38).

• As for the home connectivity segment, it continued on an uptrend with revenue higher 0.9% QoQ to RM231mn on the back of fixed-mobile convergence. The segment recorded improved net adds (+24k QoQ to 730k) and ARPU (+1.2% QoQ to RM110).

Outlook

• Guidance for FY23 Largely Intact. Management maintained guidance for FY23’s service revenue to grow by a low single-digit % and EBITDA to be flat (FY22: RM3.9bn). We remain firm on Maxis’ ability to maintain service revenue resilience underpinned by its convergence strategy, particularly with the ongoing focus on mobile and fibre/wireless bundles. As for CAPEX, management toned down guidance for FY23 to be slightly less than RM1.0bn (previously to be flat vs FY22’s of RM1.1bn). 9MFY23’s CAPEX at RM684mn was lower by 25.3% YoY, with the prudence attributed to stabilised network capacity requirement and 5G developments.

• Embarking on Cost Optimisation. Management highlighted that Maxis has embarked on a 3-year cost optimisation exercise as it seeks to remain competitive in the long run against the evolving landscape of the telecommunications industry. For a start, the group had kicked off with the right sizing of manpower, with headcount reduced by ~10%. This led to the aforementioned restructuring charges in 3QFY23, which management guided as a one-off with an expected payback period of 1 year. Going forward, the group plans to leverage automation and digitalisation to extract efficiencies across the organisation.

• 5G. Following Maxis’ execution of the 5G Access Agreement with Digital Nasional Bhd (DNB) in August 2023, Maxis has launched new 5G plans for all consumer and enterprise segments. However, management continued to guide that Maxis’ commitment for 5G in FY23 will remain insignificant as charges are currently dependent on the capacity provided by DNB while it continued working towards 80% of 5G population coverage by year-end.

Impact

• We have cut our FY23F earnings forecast by 8.0% after incorporating higher expenses to reflect actual 3QFY23 results.

Valuation & Recommendation

• We reiterate our Sell recommendation on Maxis with an unchanged 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 an 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 heightened price competition and regulatory changes.

Source: TA Research - 14 Nov 2023