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' 9MFY20 normalised net profit of RM1,062mil came in largely within expectations, accounting for 74% of our FY20F net profit and 73% of street’s. As a comparison, 9M accounted for 71%–74% of FY15–FY17 normalised earnings.
• Maxis conservatively kept its 3QFY20 dividend at 4 sen (flat QoQ), which translates to a 9MFY20 DPS of 12 sen (-20% YoY) and payout ratio of 88% for 9MFY20 vs. 101% in 9MFY19 amid the social and economic disruptions caused by Covid-19.
• Maxis’ 9MFY20 normalised net profit shrank 8% YoY due to the termination of the 3G wholesale radio access network arrangement with U Mobile, halving of mobile termination rates, reduced roaming charges and tripling of doubtful debt provision to RM265mil and 7% increase in depreciation to RM1bil. The group’s 9MFY20 mobile revenue decline of 6% YoY to RM5bil was partly offset by higher contribution from enterprise fixed services (+91%) and home fibre (+33%).
• Maxis’ 3QFY20 normalised net profit rose 8% QoQ to RM364mil in tandem with a 2% increase in service revenue driven by prepaid segment, enterprise solutions and fibre contributions. This was partly offset by higher device (34%), traffic (+9%), marketing (53%) and operation & maintenance costs (+17%).
• 3QFY20 service revenue climbed QoQ largely due to higher blended average revenue per user (ARPU) of RM49/month (+RM2/month QoQ) as postpaid subscribers increased by 54K to 3.9mil and fibre users expanded by 13K to 424K with the relaxation of the movement control order in April this year.
• However, Maxis’ overall subscribers still contracted by 618K QoQ to 11.1mil due to a much larger reduction of 683K prepaid users to 7.4mil from SIM consolidation amid intense competition. Additionally, home fibre ARPU slid RM2/month QoQ to RM104/month from new subscribers at lower entry price.
• Maxis’ capex rose 23% to RM319mil for 3QFY20, which translates to a 17% YoY increase to RM265mil for 9MFY20. This was largely spent on its core network capacity expansion, translating to 13% of service revenue and largely in line with the group’s earlier FY20F base capex guidance of RM1bil.
• Given the uncertain impact from the Covid-19 pandemic, management has yet to provide a fresh guidance following the withdrawn expectation of a “flat to low single-digit increase” for both FY20F service revenue and normalised EBITDA.
• The stock’s FY21F EV/EBITDA of 12x is slightly below with its 3- year average of 13x, while providing a fair dividend yield of 4%.

Source: AmInvest Research - 23 Oct 2020