Fixed broadband future revenue growth driver for Maxis

KUALA LUMPUR: CIMB Equities Research expects fixed broadband to be the future revenue growth for Maxis Bhd.

It said on Thursday Maxis expect discussions with Telekom Malaysia on a new high speed broadband (HSBB) wholesale agreement to conclude by end-July/August. 

“With support from the regulators, it is optimistic on a favourable outcome and believes the fixed broadband business may represent an interesting revenue growth area,” it said. 

CIMB Research believes it may be hard for Maxis to undercut TM's pricing for 100Mbps but it could offer lower prices for lower speed plans (e.g. 10-50Mbps), based on the mandatory standard on access pricing for HSBB.

“Maintain Hold with a 2% lower discounted cashflow-based target price of RM5.70 (WACC: 7.3%), after factoring in a) 0.5 percentage point increase in the risk-free rate to 4%, and b) roll forward of the base year,” it said.

The research house expects flat earnings before interest, tax, depreciation and amortisation (Ebitda) compounded annual growth rate (CAGR) in FY17-20F due to the impact from the U Mobile 3G RAN sharing contract termination. 

“Valuation-wise, Maxis’s FY19F enterprise value/operating free cashflow (EV/OpFCF) of 17.7 times is at a 33% premium over the Asean telco average. Downside risk: structural headwinds as the market approaches network parity. Upside risk: better sales growth,” it said.

Commenting on the results, it said Maxis 2Q18 Ebitda slid 1.3% quarter-on-quarter (+0.1% year-on-year) on higher opex, partly offset by higher service revenue. 

Core EPS fell a steeper 5.9% quarter-on-quarter (-4.2% year-on-year), mainly due to accelerated depreciation. 1H18 core EPS was largely in line, at 48%/50% (Ebitda: 49%/47%) of CIMB Research/Bloomberg consensus FY18F forecasts.

Maxis’s FY18 guidance is unchanged, with service revenue/Ebitda to decline in the mid/high-single digits and base capex at RM1bil.

After two successive quarters of declines, 2Q18 mobile service revenue grew 1.6% quarter-on-quarter (-3.4% year-on-year) (Digi: steady quarter-on-quarter). 

Postpaid revenue growth was quite encouraging at 2.4% quarter-on-quarter (+6.7% year-on-year), driven by continued subs growth (+2.0% quarter-on-quarter, net add: +58,000) while average revenue per user (ARPU) rose 2.2% quarter-on-quarter, mostly due to seasonality. 

Prepaid revenue rose 0.6% quarter-on-quarter (-13.0% year-on-year), driven by marketing initiatives, halting a decline since 1Q17. 

Quarter-on-quarter, prepaid subs fell a milder 0.6% (-39,000) while average revenue per user (ARPU) rose 2.4%.

Maxis’ Ebitda margin on service revenue eased 1.5% pts quarter-on-quarter to 50.0%. This was mainly from higher realised forex losses, operating and maintenance (O&M) and marketing (one-off 2018 World Cup sponsorship) costs, partly buffered by lower network and direct costs.

Maxis’s 4G coverage stayed at 92% in 2Q18, still ahead of Digi’s 89%. 2Q18 capex spend of RM212mil was stable year-on-year, given its already-high 4G coverage. 

While average data usage has continued to rise (average: 9.1Gb/month, +18.7% quarter-on-quarter) in 2Q, Maxis does not expect capex to rise in the next few years before 5G is rolled out. Net debt/Ebitda of 1.8 times was steady quarter-on-quarter at end-2Q18.
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