MAXIS’s FY23 results trailed expectations mainly due to drag from accelerated depreciation in 4QFY23. Its FY23 core net profit grew 3.5% YoY on the back of improved service revenues and normalised taxes. It guided for low-single digit service revenue growth, stable EBITDA and capex of <RM1b in FY24. We maintain our forecasts, TP of RM5.30 and OUTPERFORM call.

Lagged expectations. MAXIS’s FY23 core net profit of RM1.23b was below our expectations and consensus at 92% of our full-year forecast and 94% of the full year consensus estimate, respectively. The shortfall versus our forecast was largely attributed to accelerated depreciation charges recognized in 4QFY23. It declared DPS of 4 sen in 4QFY23, which brings cumulative FY23 DPS to 16 sen.

Core net profit excludes exceptional items recognized in 4QFY23 that include: (i) tax settlement (RM73m) to the Inland Revenue Board for additional assessments, and (ii) write-off (RM161m) for certain telecommunication equipment and software that were no longer in use.

Service revenue growth driven by postpaid. FY23 service revenue growth (+4.2% YoY) surpassed MAXIS’ guidance (low-single digit growth) and was mainly driven by the postpaid segment. This was on the back of subscriber base expansion (+7.6%) following the introduction of postpaid plans with lower entry price points (starting from RM30 per month). To a lesser extent, service revenues were also boosted by stronger segmental performances from: (i) enterprise: largely driven by 4-month contribution from provision of wholesale 4G MOCN, 4G and 2G domestic roaming services to TM, and (ii) consumer fiber: net adds were propelled by MAXIS’ proposition of fixed-mobile convergence.

Weighed down by accelerated depreciation… FY23 EBITDA growth (+1.4% YoY) also exceeded MAXIS’ guidance of flat growth despite a 1ppt contraction in EBITDA margin. The latter emanated from higher opex, particularly for: (i) staff compensation due to the manpower right sizing exercise in 3QFY23, (ii) increased traffic costs, and (iii) reduced government grants due to less Universal Service Provision projects.

…but rescued by lower taxes. However, FY23 pretax profit dipped by 20% YoY mainly due to accelerated depreciation (RM163m) in 4QFY23. The latter was to pre-empt the looming implementation of the 5G dual network (DN) model in Malaysia. To a lesser extent, profits were also dragged by higher finance costs (+8% YoY) on the back of interest rate hikes. Nevertheless, the saving grace was the absence of Cukai Makmur - which led to FY23 core net profit expansion of 3.5% YoY.

Weak ARPUs but strong net adds. Weaker YoY APRUs were attributed to: (i) postpaid: following introduction of lower entry level plans, (ii) prepaid: on the back of stiff competition, and (iii) consumer fiber: introduction of cheaper plans in Oct 2023 to comply with updated price recommendations under the Mandatory Standard on Access Pricing. On the bright side, YoY subscriber net adds was robust across the board (except for consumer wireless).

Sequential recovery in EBITDA margin. QoQ expansion in service revenue (+2.7%) was mainly driven by the postpaid and fiber segments as highlighted above. The growth cascaded to bottomline (+3.5%) as EBITDA margins rebounded given the absence of chunky staff costs (as mentioned above).

Key takeaways from MAXIS’ results’ briefing are as follows:

1. MAXIS introduced its FY24 guidance comprising: (i) service revenue: low-single digit growth, (ii) EBITDA: relatively unchanged versus FY23, and (iii) capex: less than RM1b. Expectations of flat EBITDA in spite of topline growth are due to cost drag emanating from 5G access payments to Digital Nasional Berhad (DNB). This guidance does not include the impact from the looming implementation of the new 5G Dual Network (DN) model.

2. The due diligence exercise on DNB is expected to reach completion in 2QFY24. Hence, this will pave the way for the implementation of the new 5G DN model. Pending the outcome of this, MAXIS will hold back on capex investments until clarity emerges.

3. MAXIS is keen to maintain Huawei as its key technology partner and supplier of 5G telco equipment.

Forecasts. We maintain our FY24F earnings, while introducing FY25F numbers.

Valuations. We also maintain our TP of RM5.30 which is based on unchanged 12xFY24 EV/EBITDA. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to like MAXIS due to: (i) its sustained subscriber net adds in the high margin postpaid segment on the back of up-selling and its convergence strategy, (ii) its ongoing 3-year cost optimization exercise that may potentially uplift margins, and (iii) expectation of a ramp-up in 5G monetization as enterprise clients intensify digitalization measures. Maintain OUTPERFORM.

Risks to our call include: (i) unfavourable outcome from implementation of the 5G DN model, (ii) loss of competitive edge due to excessive cut in resources from cost optimization, and (iii) enterprise customers are slow to upgrade to 5G due to hefty technology investments.

Source: Kenanga Research - 23 Feb 2024