Maxis reported a weak set of results – 6M19 core net profit fell by 20% yoy to RM795m on lower service revenue (-3.7%), higher operating expenses and higher depreciation costs. The decline in service revenue was mainly due to lower contribution from the wholesale segment. Overall, the results were within market and our expectations. Maintain SELL with an unchanged DCF-derived price target of RM5.05. At 25x 2020E PER, valuation looks rich considering its weak earnings outlook and competitive business environment.

6M19 Core Net Profit Fell by 20% Yoy, Within Expectations

Maxis reported a weak set of results – 6M19 core net profit fell by 19.7% yoy to RM795m on lower service revenue (-3.7% yoy) and higher costs. The decline in service revenue was largely due to lower wholesale revenue (-56% yoy to RM102m). Excluding the wholesale business, Maxis’ mobile service revenue grew by 0.1% yoy to RM3.76bn on higher subscribers that more than offset weaker ARPUs. Elsewhere, a higher staff cost, increase in traffic, commissions & other direct expenses, and rising depreciation, finance costs have weakened Maxis’ profitability. Notwithstanding a weakened earnings, Maxis maintained its quarterly dividend of 5 sen per share (10 sen for 6M19). Overall, the results were broadly within market and our expectations – 6M19 core net profit accounted for 48-49% of our and the street’s full-year earnings forecasts.

Sequentially, Earnings Declined by 3%

Sequentially, Maxis’ 2Q19 core net profit slipped by 3.2% qoq to RM391m, due to 1.2% lower revenue qoq (due to further decline in wholesale revenue), partly cushioned by lower operation & maintenance expenses (which benefited from some one-off savings).

Higher Subs But Lower ARPUs

Maxis had 10.9m mobile subscribers as at 2Q19 (+1.5% yoy) as the growth in postpaid subscribers (+13.9% yoy to 3.44m) outpaced the decline in prepaid subs (-3.3% yoy to 7.46m). Elsewhere, Maxis’ home broadband subs increased by 42% yoy to 276,000. Nonetheless, lower ARPUs for mobile (-4% to RM53) and home broadband (-25% to RM106) has dampened the revenue uplift from its subscriber growth.

Maxis Maintains 2019 Guidance – Mid Single-digit Decline in EBITDA

Management has maintained its 2019 guidance, expecting service revenue to fall by low single digits and EBITDA to decline by mid single digits.

Maintain Earnings Forecasts, SELL Rating and TP of RM5.05

We maintain our earnings forecasts, SELL rating and DCF-derived price target of RM5.05. At 25x 2020E PER, valuation looks rich considering its weak earnings outlook. For exposure, we prefer Digi (DIGI MK, RM5.00, Hold) for the possible value accretive merger with Celcom. Key risks to our negative view on Maxis include: (i) stronger than expected service revenue growth; (ii) lower than expected operating costs; and (iii) better than expected investor receptions on Maxis’ new strategy.

Source: Affin Hwang Research - 5 Aug 2019