Operationally, 2019 was a good year for Maxis as it grew its cellular subs while Digi and Celcom skidded. Financially however, Maxis fared the worst with a 15% decline in 2019 core net profit. In 2020, we expect fortunes to turn when Maxis’ service revenue outpaces its costs increase, translating to higher earnings, while Digi and TM see earnings dips due to declining service revenues. Overall, we are Neutral on the telco sector; the sectors’ lacklustre growth is compensated by dividend yields of 3-4%. For exposure, we like Maxis (HOLD) for its superior network infrastructure and positive earnings outlook.

Maxis Added Subs, Grew Its Service Revenue While Celcom Lost Out

In 4Q2019, Maxis grew its cellular subs by 3.2% yoy while Celcom’s cellular subs shrank by 7.8% yoy and Digi's came in 3.3% lower. Maxis' outperformance was, in our view, driven by its strong branding in the postpaid segment and its active marketing push for entry-level postpaid packages. Despite declining postpaid APRUs, Maxis’ ex-wholesale service revenue reported three consecutive quarters of growth due to an increase in the number of subs.

Higher Revenue Does Not Equate to Higher Profit, for Now

The sector’s core earnings recovered from a dismal RM2.8bn in 2018 to RM4.9bn in 2019 driven by Axiata’s earnings turnaround and TM’s nearrecord earnings arising from its commendable cost-optimisation initiatives. Maxis and Digi, however, reported lower profits due to lower service revenue (Maxis and Digi) and higher operating / depreciation charges (Maxis). Ironically, Maxis has outperformed its peers in terms of revenue growth (for Malaysia operations) but underperformed on earnings realisation due to high upfront costs relating to its aggressive expansion plans.

Maxis and Axiata Gave Positive Guidance; TM and Digi Were Cautious

Maxis gave its first positive earnings guidance in recent years, expecting a flat to single-digit increase in its 2020 EBITDA. On the flip side, Digi expects its 2020 EBITDA to be flat to a low single-digit decline. The contrast is, in our view, due to the differences in their investment cycles where Maxis anticipates its service revenue growth (partly driven by the enterprise segment) to outpace increase in costs while Digi may incur higher device and network costs to grow its postpaid market share. Elsewhere, TM expects lower revenue and gave cautious 2020 EBIT guidance of “over RM1.0bn”. Meanwhile, Axiata remained positive and guided for 4.0-5.5% growth in 2020 EBITDA.

Maintain Sector Neutral Call; Maxis (HOLD) Is Our Top Pick

Maintain Neutral - the sectors’ uninspiring earnings trajectory is somewhat cushioned by its relative earnings resiliency during times of heightened economic uncertainty, relatively lower foreign shareholdings and dividend yields of 3-4%. Maxis (HOLD) is now our preferred pick on a relative basis for its superior network infrastructure, positive earnings outlook, stable dividend and first-mover advantage in developing converged solutions for individuals, homes and businesses.

Source: Affin Hwang Research - 9 Mar 2020