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This article first appeared in The Edge Financial Daily on October 27, 2017

Maxis Bhd
(Oct 26, RM5.82)
Maintain neutral with a higher target price (TP) of RM6.10:
Maxis Bhd reported a net profit of RM554 million for the third quarter of financial year 2017 (3QFY17) (+10.1% year-on-year [y-o-y]), mainly lifted by higher revenue, lower effective tax rate and positive results from cost optimisation initiatives (that is, efficient marketing spend).

After adjusting for unrealised forex gain and charge-out of spectrum assignment upfront fees, 3QFY17 normalised net profit rose by 16.1% y-o-y to RM562 million. Cumulative nine-month FY17 (9MFY17) normalised net profit improved by 9.1% y-o-y to RM1,560 million. The results were above expectation, accounting for 86.4% and 80.4% respectively of our and consensus full-year estimates.

Although revenue was in line with our estimates, the main discrepancy in our earnings forecast was due to lower total cost. As such, we raise our FY17F to FY19F earnings forecasts by 6% to 9% after lowering our cost assumption, particularly marketing and direct costs.

Our discounted cash flow (DCF)-based TP is revised up from RM5.90 to RM6.10. Given an upside potential of only 5.5%, we maintain our “neutral” rating. Maxis declared a third interim dividend per share (DPS) of five sen, bringing total DPS to 15 sen (first half FY16: 15 sen).

3QFY17 revenue improved 2.8% y-o-y on the back of higher service and non-service revenue. Mobile revenue grew by 1.4% on higher post-paid revenue. Post-paid revenue increased by 9.3% y-o-y, mainly driven by both increase in customer based and higher average revenue per user (ARPU).

Although prepaid ARPU was higher at RM37 (3QFY16: RM36), prepaid revenue declined by 6.1% y-o-y due to the lower subscription base (which was impacted by the continued SIM consolidation and intense price-focused competition). Non-service revenue, which only accounted for 2.8% of the group’s revenue, increased by 44.2% y-o-y to RM62 million, mainly due to higher device sales and hubbing income.

Normalised 3QFY17 net profit increased 16.1% y-o-y on higher revenue (+2.8% y-o-y), lower effective tax rate (3QFY17: 23.8% versus 3QFY16: 25.7% ) and positive results from cost optimisation initiatives. As a result, 3QFY17 normalised earnings before interest, taxes, depreciation and amortisation (Ebitda) margin was higher at 54.2% compared with 53.1% in 3QFY16. Maxis continued to lead the market with its expanded 4G LTE network at 89% population coverage.

Demand for data continued to grow with six million 4G LTE users (3QFY16: 4.1 million) and an average usage of 7.4gb per month (3QFY16: 4.4gb). It is financially fit to secure spectrum under the 700MHz band. Following the recent fundraising exercise, Maxis’ gross debt to earnings before Ebitda has improved (projected at slightly below two times for FY19F) and we believe it is in a better position to secure additional spectrum under the 700MHz band.

Maxis should be able to easily fund the cost of a two-block 2x5MHz spectrum that is estimated at around RM1 billion.

Since the spectrum is only available in January 2019, full-year impact would only be felt in FY19F. Our preliminary estimates suggest a FY19F earnings impact of -2.2% (assuming Maxis secures two blocks of spectrum). — PublicInvest Research, Oct 26

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