Investment Highlights

• We maintain Maxis’ HOLD rating with an unchanged DCFderived fair value of RM5.50/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 FY20F–FY22F earnings are maintained as Maxis' 1HFY20 normalised net profit of RM698mil came in largely within expectations, accounting for 47% of our FY20F net profit and 48% of street’s. As a comparison, 1H accounted for 48%–56% of FY17–19 earnings. The group kept its 2QFY20 dividend at 4 sen (flat QoQ), which translates to a payout ratio of 89% for 1HFY20 vs. 97% in 1HFY19 amid the ongoing Covid-19 pandemic.

• Given the uncertain impact from the Covid-19 pandemic, management has not reintroduced a fresh guidance following the withdrawn expectation of a “flat to low single-digit increase” for both FY20F service revenue and normalised EBITDA.

• Maxis’ 1HFY20 normalised net profit shrank 12% YoY due to the termination of the 3G wholesale radio access network arrangement with U Mobile, halving of mobile termination rates, a 5% increase in traffic costs to RM844mil, 3.6x surge in doubtful debt provision to RM217mil and 15% increase in depreciation to RM677mil. However, the group’s 1HFY20 mobile decline of 6% YoY to RM3.4bil was more than offset by higher enterprise fixed services (+84%), home fibre (+36%) and device sales (+14%).

• Sequentially, Maxis’ 2QFY20 normalised net profit fell by 6% QoQ to RM338mil in tandem with a 2% decline in service revenue which was partly offset by the halving of device costs and 12% reduction in traffic costs.

• QoQ, Maxis’ overall subscribers commendably rose by 414K QoQ to 11.7mil from a surprisingly strong 442K increase in prepaid customers to 7.8mil driven by the unlimited data plan launched in early June this year, rebounding from a lockdown decline in mid-March to May this year. This was partly offset by a 32K drop in postpaid users to 3.8mil from service suspensions.

• The strong prepaid outperformance was followed by wireless broadband and mobile internet users, which climbed by 4K QoQ and 100K QoQ respectively. However, blended ARPU slid by RM2/month QoQ to RM47/month in tandem with postpaid contracting by RM2/month and prepaid by RM1/month.

• As the movement control order was gradually relaxed from April, home connections jumped by 18K QoQ to 366K while business connections increased by 1K QoQ to 45K. Home fibre ARPU slid RM3/month QoQ to RM106/month from new entry-level recruits.

• Maxis’ 1HFY20 capex expanded 7% YoY to RM422mil on spending on its core network capacity expansion, translating to 11% of service revenue and below the group’s earlier FY20F base capex guidance of RM1bil. The stock’s FY20F EV/EBITDA of 13x is currently on parity with its 3-year average, while providing a fair dividend yield of 4%.

Source: AmInvest Research - 24 Jul 2020