This article first appeared in The Edge Financial Daily on October 22, 2018

Maxis Bhd
(Oct 19, RM5.39)
Maintain underweight with an unchanged fair value (FV) of RM5.20: We maintain our “underweight” recommendation on Maxis Bhd with an unchanged discounted cash flow-derived FV of RM5.20 per share, based on a weighted average cost of capital discount rate of 6.4% and a terminal growth rate assumption of 2%, implying a financial year 2019 forecast (FY19F) enterprise value-to-earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) of 13 times and on par with its three-year average.

The group declared a third quarter of FY18 (3QFY18) dividend of five sen, which leads to a flat year-on-year (y-o-y) nine months of FY18 (9MFY18) dividend per share (DPS) of 15 sen and a 77% payout, within our FY18F assumption of 76% versus 68% and 75% in FY16 and FY17.

Our forecasts are maintained as Maxis’ 9MFY18 normalised net profit of RM1.5 billion (-3% y-o-y) came in generally within expectations, accounting for 79% of both our FY18F earnings and 78% of street’s.

Even though 9MFY15 to first half of FY17 (1HFY17) represented a lower range of 71% to 74% of FY15 to FY17 normalised earnings, we expect a weaker 4QFY18 from the cessation of U Mobile’s leasing arrangement with Maxis’ 3G radio access network on Dec 27, 2018. This is supported by management’s unchanged guidance for a high single-digit FY18F Ebitda decline versus a normalised contraction of only 2% in 9MFY18.

Maxis’ 3QFY18 normalised net profit rose 8% quarter-on-quarter (q-o-q) to RM518 million from a 1% revenue increase to RM2.3 billion together with a 3% depreciation reduction and 5% decrease in traffic costs from the group’s contract renegotiations with suppliers.

Sequentially, Maxis’ 3QFY18 service revenue edged up 0.7% from the 86,000 increase in post-paid subscribers to 3.1 million, which was partly offset by the prepaid decline of 13,000 to 7.7 million, while blended average revenue per user was flat at RM53 per month. The group’s post-paid share of service revenue has gradually risen to 55% in 3QFY18 from 48% in 1QFY17.

All in, Maxis registered a second consecutive total subscriber gain of 73,000 q-o-q against the backdrop of a contracting base since 2QFY15, which has led to a loss of 2.1 million customers from SIM consolidation amid intense competition.

As Maxis’ 9MFY18 service revenue declined by 3%, Maxis maintains its cautious FY18F service revenue guidance of a mid-single-digit decline versus our assumption of -4%.

Also, management indicated that 4QFY18 capital expenditure (capex) could sharply accelerate as 9MFY18 capex of RM514 million accounts for only 51% of Maxis’ unchanged guidance of RM1 billion, which translates into FY17 capex-to-service revenue of 12%. This excludes spectrum payments, such as for the 2,100 megahertz’s (MHz) RM118 million price component and the upcoming 700MHz fees.  

Amid likely down-trading activities for lower priced home fibre packages at new higher speeds in an increasingly competitive fixed broadband market, we view the premium FY19F EV/Ebitda of 13 times versus its three-year average of 12 times as unjustified. — AmInvestment Bank, Oct 19