Maxis’ 1H20 core net profit of RM698m (-12% YoY) exceeded our expectation (due to better EBITDA margin and higher finance income) but in line with consensus. Declared second interim dividend of 4.0 sen per share. Postpaid underperformed but surprisingly, prepaid sub gained coupled with ARPU improvement. Home fibre was the silver lining with good traction on sub acquisition. We raised our projections and DCF-derived TP to RM5.17. Maintain HOLD.

Above expectations. 2Q20 core net profit of RM338m (-6% QoQ, -14% YoY) brought 1H20’s to RM698m (-12% YoY) which exceeds our expectation, accounting for 55% of our full year forecast but in line with consensus at 48%. The deviations were due to higher-than-expected EBITDA margin and finance income. One-off adjustments include forex gain and its tax effect totalling -RM5m.

Dividend. Declared second interim tax exempt (single-tier) dividend of 4.0 (2Q19: 5.0) sen per share, representing 91% payout ratio. Ex-date on 27 Aug. YTD DPS amounted to 8 sen (1H19: 10 sen).

QoQ. Top line skidded 8% mainly due to the 39% drop in device revenue. More importantly, service revenue also moderated 2% as both mobile and enterprise services declined 2% while home fibre was flat. In turn, core net profit fell by smaller quantum of 6% to RM338m thanks to savings in device (-48%), marketing (-25%) and other O&M (-11%) costs.

YoY. Revenue dipped 3% to RM2.2bn as the growths in enterprise services (+84%) and home fibre (+31%) were unable to offset the contractions in mobile (-6%) and device (-15%). Subsequently, bottom line declined by 14% mainly due to higher D&A (+15%) as a result of past core and growth capex.

YTD. Top line gained 1% attributable to higher contributions from all segments except mobile (-6%) due to lower domestic roaming and prepaid revenues. Core earnings fell by 12% to RM698m on the back of higher expenses (+6%) and D&A (+10%).

Postpaid. Subscriber base fell by 15k QoQ to 3.4m in 2Q20 despite strong pre-to-post momentum with value accretive Hotlink Postpaid. Meanwhile, ARPU eroded by RM1 QoQ to RM85 due to (1) reduced international outbound roaming as a result of Covid- 19 and MCO; and (2) dilution from entry point Hotlink Postpaid. Mobile internet usage per sub has increased by 12% QoQ to 18.6GB per month.

Prepaid. Surprisingly, Maxis added 92k (or +2%) subs QoQ to a base of 6.0m while ARPU also improved by RM1 QoQ to RM40. Mobile internet usage per sub has increased by 33% QoQ to 22.5GB per month.

Fibre. Added 19k QoQ in 2Q20 to top a total base of 411k which can be broken down into 366k and 45k of residential and business users, respectively.

Forecast. Update model based on the deviations above. In turn, FY20-21 EPS are raised by 12% and 1%, respectively. Reiterate HOLD with a higher DCF-derived TP of RM5.17 (previously RM5.12), with unchanged WACC of 6% and TG of 0.5%, reflecting our upward earnings revision. 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 - 30 Jul 2020