Maxis reported a disappointing set of results – 9M19 core net profit fell 23% yoy to RM1,156m due to lower service revenue (-3.6 %) and higher costs (opex, depreciation). The lower service revenue was due to reduced contributions from the wholesale segment while Maxis’ aggressive expansion strategy resulted in higher 9M19 opex. DPS was, however, unchanged at 5 sen per quarter. Overall, the results were below market and our expectations. We cut our earnings forecasts by 10-13% to reflect elevated opex and higher depreciation expenses. In tandem, we lower our DCF-derived price target to RM4.90. At 28x 2020E PER, valuation looks rich; maintain SELL.

9M19 Core Net Profit Fell by 23% Yoy, Below Expectations

Maxis reported a disappointing set of results – 9M19 core net profit fell by 23.3% yoy to RM1,156m on lower service revenue (-3.6% yoy) and higher costs (opex, depreciation). The decline in service revenue was largely due to lower wholesale revenue (-RM221m yoy to RM122m). Excluding the wholesale business, Maxis’ mobile service revenue grew by 0.1% yoy on higher subscribers that more than offset weaker ARPUs. To grow its fibre and enterprise business, Maxis incurred higher capex and various expenses including staff cost, traffic, commissions & other direct expenses, depreciation and finance costs. Despite a weaker set of earnings, the quarterly payout remained unchanged at 5 sen per share (15 sen for 9M19). All in, the results were below market and our expectations – 9M19 core net profit accounted for 72% of market and 70% of our full-year earnings forecasts. The earnings miss was largely due to higher-than-expected opex and depreciation costs.

Sequentially, Earnings Fell by 8%

Notwithstanding a higher service revenue of RM1.94bn (+1.1% qoq), Maxis’ 3Q19 core net profit fell by 7.7% qoq to RM361m, due to higher operating expenses (operating & maintenance, traffic & commission costs) and higher depreciation & amortisation costs.

Operationally, Maxis’ Service Revenue Is Trending Nicely

Maxis had 11.04m mobile subscribers as at 3Q19 (+141k qoq) as the growth in postpaid subscribers (+143k qoq) outpaced the decline in prepaid subs (-2k qoq). Elsewhere, Maxis’ home broadband subs increased by 29k qoq to 305,000. The higher number of subs had more than offset the decline in postpaid ARPU (-RM1 to RM85), leading to a 1.7% qoq growth in service revenue (excluding wholesale revenue).

Cutting 2019-21E EPS Forecasts by 10-13%

We cut our 2019-21E earnings forecasts by 10-13% after incorporating: (i) higher opex including staff costs, operating & maintenance expenses, traffic, commission & other direct costs. The higher costs were due to upfront expenses to drive Maxis’ aggressive expansion plan, as well as the increase in business volume; (ii) higher depreciation and amortisation costs, in line with its latest cost trend; (iii) higher device costs – Maxis has sold more mobile devices (and hence, incurred higher costs) in 9M19 due to its mobile postpaid and home fibre campaigns.

Maintain SELL With a Lower DCF-derived TP of RM4.90

In tandem with our earnings cut, we lower our DCF-derived 12-month target price to RM4.90 (from RM5.05). We are neutral on Maxis’ ambitious enterprise & home fibre expansion plans. While we expect decent take-up for Maxis’ offerings, the capex and upfront costs may continue to suppress Maxis’ nearterm profitability.

We reaffirm our SELL call. At 28x 2020E PER, Maxis now trades above its past-8-year average PER of 25x, which looks pricey. Key upside 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 reception of Maxis’ new strategy

Source: Affin Hwang Research - 29 Oct 2019