MAXIS's 9MFY24 results surpassed our expectations, but tracked consensus' estimates. Robust service revenue, coupled with cost discipline uplifted 9MFY24 EBITDA margin and core net profit (+16% YoY). On a less positive note, competitive pressure on MAXIS' mobile ARPUs is mounting, as reflected in consecutive QoQ declines since 4QFY22. We tweaked our FY24F/25F earnings higher by 10%/3%, raised our TP by 2% to RM3.80 (from RM3.74), but maintain our MARKET PERFORM call.

Surpassed our expectation but within consensus. MAXIS's 9MFY24 core net profit of RM1.1b exceeded our expectation, but tracked consensus - at 84% of our full-year forecast, and 78% of the full year consensus estimate.

The outperformance versus our forecast was mainly driven by higher- than-expected USP (Universal Service Provision) income from project fulfilments. Conversely, 9MFY24 service revenue growth (+3.9% YoY) was well within our estimate.

MAXIS declared 3QFY24 DPS of 4 sen (3QFY23: 4 sen), bringing 9MFY24 DPS to 12 sen (9MFY23: 12 sen), which was within our expectation.

Uplifted by topline growth coupled with tight cost controls.

9MFY24 service revenue expansion of 3.9% YoY is in-line with MAXIS' full-year guidance (low-single digit growth). Similar to prior quarters, the expansion was mainly fuelled by: (i) consumer postpaid: given an enlarged subscriber base following a QoQ uptick of 73k net adds in 3QFY24 (2QFY24: 73k), (ii) consumer fiber: increased subscribers with decent 3QFY24 QoQ net adds of 8k (2QFY24: 8k), and (iii) enterprise fixed & solutions: boosted by new 4G MOCN (multi-operator core network) and 2G domestic roaming services contract for TM.

9MFY24 EBITDA margin expanded by 1.4 ppt YoY to 40.4%, mainly due to the absence of one-off manpower rationalisation costs recognized in 3QFY23. On the back of this and stronger revenue, MAXIS' core net profit expanded despite higher depreciation charges.

ARPU weakness emerging, but the reversal in prepaid subscriber attrition is encouraging. Sequential nets adds for MAXIS' mobile subscribers were resilient in 3QFY24, but tapered off for home fiber.

We understand the slowdown in home fiber was due to rationalization of discounts and rebates for home offerings.

Meanwhile, in terms of ARPUs, there was subtle QoQ weakness across the board. This translates to consecutive QoQ decline for mobile ARPUs since their recent peaks in 4QFY22.

In essence, despite MAXIS' strategy to drive migration from prepaid to postpaid, net attrition for prepaid subscribers appear to have reversed over the past two quarters. Hence, this suggests that its portfolio rebalancing may be nearing completion. However, there are emerging pressures on ARPU, likely driven by competition.

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

1. 5G wholesale access fees in 3QFY24 saw a slight increase to less than RM50m, compared to RM40m per quarter in 1HFY24. This uptick was primarily driven by increased 5G traffic as MAXIS completed the migration of all its customers to 5G during 3QFY24. Assuming the current 5G access agreement remains unchanged, MAXIS anticipates a normalized quarterly fee of less than RM50m moving forward.
2. The group is actively bidding for contracts to deliver domestic and international data center (DC) connectivity to a diverse range of customers, including hyperscalers, DC operators, and enterprise DC users.
3. MAXIS revealed FY24 EBITDA guidance of "low single-digit growth" and withdrew its previous EBIT guidance of "marginal- to-low single-digit growth." Its YTD EBITDA growth of 8% aligns with this updated outlook.
4. Despite strong interest in MAXIS' new GPU-as-a-Service (GPUaaS) offering, the group observed that many potential customers lack the capabilities to effectively utilize this service. Therefore, MAXIS is collaborating with its GPUaaS partner, Bridge Alliance, to explore solutions that address the needs of these customers.
5. The QoQ spike in operations and maintenance (O&M) costs was due to a one-off charge for migrating one of MAXIS' accounting systems from a capex model to an opex-based model. Looking ahead, MAXIS anticipates incurring one-off subsidy costs for the iPhone 16 in 4QFY24.

Forecast. We raised our FY24F and FY25F earnings by 10% and 3%, respectively, to account for higher USP income.

Valuations. Our TP for MAXIS is raised by 2% to RM3.80 (from RM3.74) based on unchanged 8.3x FY25F 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. YTD, MAXIS has demonstrated robust service revenue growth, laudable cost discipline, and healthy subscriber trends. However, over the medium-to-long term, we anticipate MAXIS may soon lag behind its competitor, CDB. This is due to CDB's better economies of scale, and its aggressive plans to achieve RM8b in NPV from merger synergies (post-merger net synergies as at 2QFY24: RM700m). Maintain MARKET PERFORM.

Risks to our call include: (i) competition between mobile players turn irrational, (ii) loss of competitive edge due to excessive cut in resources from cost optimization initiatives, and (iii) enterprise customers are slow to adopt 5G due to additional technology investments and reluctance to transform existing processes.

Source: Kenanga Research - 11 Nov 2024