Maxis’ 1Q20 core net profit of RM360m (+5% QoQ, -11% YoY) is a miss due to higher cost and D&A. Declared first interim dividend of 4.0 sen per share. Postpaid sub continued to grow at the expense of prepaid’s but both ARPUs are eroding at alarming rates. Home fibre was the silver lining with good traction on sub acquisition. Maxis scrapped its FY20 guidance but remains confident over the long-term vision. We cut our projections and lowered our DCF-derived TP to RM5.12. Maintain HOLD.

Below expectation. 1Q20 core net profit of RM360m (+5% QoQ, -11% YoY) was a disappointment, accounting for 22% and 23% of HLIB and consensus full year forecast, respectively. The deviations were higher-than-expected cost structure and D&A. One off adjustments include forex loss and its tax effect totalling +RM2m.

Dividend. Declared first interim tax exempt (single-tier) dividend of 4.0 (1Q19: 5.0) sen per share, representing 87% payout ratio. Ex-date on 28 May. Maxis claimed that the reduction is a prudent measure to ensure cash preservation in view of the Covid -19 uncertainties.

QoQ. Top line skidded 10% mainly due to the 35% drop in device revenue. More importantly, service revenue also moderated 3% as the gains in enterprise fixed (+11%) and home fibre (+9%) were unable to offset the decline in mobile (-4%). However, core net profit improved by 5% to RM360m thanks to lower traffic, device, commissions and other direct costs (-25%).

YoY. Revenue inched up 5% to RM2.3bn stimulated by stronger device sales (+41%) while service revenue was rather flattish. The breakdown of service revenue revealed that mobile sustained its downtrend with -6% and this was fully offset by the growths in enterprise fixed (+84%) and home fibre (+41%). Nevertheless, bottom line shrunk by 11% with higher D&A (+12%) and cost structure, especially in direct (+16%) and bad debt provision (+300%).

Postpaid. Subscriber base continued to climb in 1Q20, topping 3.4m after adding 48k (or +1%) QoQ on the back of strong pre-to-post momentum with value accretive Hotlink Postpaid take-up. On the other hand, ARPU eroded by RM4 to RM86 due to (1) loss of inbound and outbound roaming as a result of Covid-19 and MCO; (2) 50% reduction in mobile termination rate; and (3) dilution from entry point Hotlink Flex. Mobile internet usage per sub has increased by 8% QoQ to 16.7GB per month.

Prepaid. Amid pre-to-postpaid migration as well as deteriorating migrant market, Maxis continued to experience churn of 344k (or -6%) subs QoQ to a base of 5.9m while ARPU also contracted by RM3 QoQ to RM39. Mobile internet usage per sub has increased by 15% QoQ to 16.9GB per month.

Fibre. Added 23k QoQ in 1Q20 to top a total base of 392k which can be broken down into 348k and 44k of residential and business users, respectively.

FY20 guidance. Withdrawn until more clarity on the impact of Covid-19.

Forecast. Update model based on the deviations above. In turn, FY20-21 EPS are toned down by 24% and 12%, respectively. Reiterate HOLD with a lower DCF-derived TP of RM5.12 (previously RM5.17), with unchanged WACC of 6% and TG of 0.5%. Maxis is still the largest telco in terms of revenue market share with quality of service as differentiation to drive leadership in data adoption, but Covid-19 headwinds pose near term uncertainty.

Source: Hong Leong Investment Bank Research - 27 Apr 2020