Investment Highlights

• We downgrade Maxis’ rating to HOLD from BUY as its share price has risen by 15% since our upgrade on 18 March 2020 from a 10+- year low of RM4.68/share to near our lower DCF-derived fair value of RM5.50/share (from an earlier RM5.76/share). This is based on a WACC discount rate of 6.3% and terminal growth rate assumption of 2%, implying an FY20F EV/EBITDA of 13x and is on par with its 3-year average.

• Our lower fair value stems from a 6% drop in Maxis’ FY20F–FY22F earnings from higher operating cost assumptions as Maxis' 1QFY20 normalised net profit of RM360mil came in below our and street’s expectations, accounting for 23% of our FY20F net profit.

• As a comparison, 1Q accounted for 25%–29% to FY17–19 earnings. The group declared a lower 1QFY20 dividend of 4 sen (vs. 5 sen in 1QFY19), which translates to a payout ratio of 87% vs. 96% in 1QFY19 amid the ongoing Covid-19 pandemic. Hence, we have lowered FY20F DPS by 1 sen to 19 sen. Given the uncertain impact from Covid-19 movement restrictions, management is withdrawing its earlier guidance for a “flat to low single-digit increase” for both FY20F service revenue and normalised EBITDA.

• Maxis’ 1QFY20 normalised net profit decreased 11% YoY despite a flattish service revenue due to the loss of U Mobile RAN lease income, a 16% increase in traffic costs to RM856mil, RM99mil bad debt provision and 13% increase in depreciation to RM334mil. Service revenue was flat as a 4% reduction in mobile revenue was offset by increased enterprise fixed services and home fibre revenues.

• Sequentially, Maxis’ 1QFY20 normalised net profit rose by 5% QoQ to RM344mil despite a 3% decline in service revenue from the government-mandated drop in mobile termination rates which was more than offset by a 25% decrease in lumpy handsetimpacted traffic costs and 10% contraction in finance cost to RM112mil.

• QoQ, Maxis’ overall subscribers commendably climbed by 91K QoQ to 11.2mil from a 78K increase in postpaid customers to 3.8mil and 13K growth in prepaid users to 7.4mil. However, based on revenue-generating subscribers within 30 days, prepaid subscribers fell 344K QoQ and 584K YoY to 5.9mil from SIM consolidation and postpaid migration. Likewise, blended ARPU slid by RM2/month QoQ to RM49/month in tandem with postpaid and prepaid both contracting by RM2/month.

• As the movement control order had only a 2-week impact in March, the increase in home connections was still commendable, rising by 21K QoQ and 97K YoY to 348K while business connections increased by 2K QoQ and 15K YoY to 44K. Home fibre ARPU was flat QoQ at RM109/month.

• Maxis’ 1QFY20 capex rose 28% YoY to RM163mil due to spending on its core network capacity expansion but seasonally lower by 72% QoQ. Translating to 8% of service revenue, this is below the group’s FY20F base capex guidance of RM1bil. The stock’s FY20F EV/EBITDA of 14x is currently on parity with its 3-year average, while providing a fair dividend yield of 4%.

Source: AmInvest Research - 27 Apr 2020