Maxis reported a weak set of results: 1Q20 core net profit fell by 10.9% yoy to RM360m due to higher direct costs and a spike in allowance for doubtful debts. Sequentially, 1Q20 core net profit grew 4.7% on lower staff and O&M costs that more than offset a 2.6% qoq decline in service revenue. Maxis unexpectedly lowered its 1Q20 dividend to 4 sen (from its prior quarterly payout of 5 sen). Broadly, the results were within our expectations but below the street’s forecasts. We maintain our SELL rating with an unchanged DCF-derived price target of RM4.55. At a 30x 2020E PER, Maxis is trading at 1 standard deviation above its 9-year average PER, and looks pricey considering its weak earnings outlook, declining dividend and the difficult market conditions.

1Q20 core profit fell 11%, below consensus but within our expectations

Maxis delivered a weak set of results: 1Q20 core net profit fell by 10.9% yoy to RM360m due to higher traffic, device, commission & other direct costs (+16% yoy to RM856m) and a spike in allowance for doubtful debts (+200% yoy to RM99m). The group reported a higher revenue of RM2.34bn (+4.9% yoy) due to higher device sales of RM377m (+43% yoy); its service revenue weakened by 0.4%, however, due to lower mobile service revenue (-5.5%) that was partly mitigated by higher contributions from the enterprise fixed and home fibre segments. Broadly, the 1Q20 core net profit was within our expectations (26% of full-year forecast) but below market expectations (23% of consensus full-year estimate).

Maxis Has Unexpectedly Lowered Its DPS to 4 Sen (from 5 Sen)

The group has unexpectedly lowered its 1Q20 dividend per share to 4 sen (from 5 sen in 1Q19). To recap, Maxis has been consistently paying a quarterly DPS of 5 sen since 1Q15. During 3Q19 and 4Q19, Maxis paid 5 sen DPS per quarter, which was above its core EPS of 4.5-4.6 sen. Looking ahead, we expect the group’s quarterly payout to track its earnings.

Sequentially, revenue has declined but profit was lifted by lower costs

Sequentially, Maxis’ service revenue fell by 2.6% qoq due to lower mobile service revenue (-4.2%) as the group saw a notable decline in both its prepaid and postpaid ARPUs (Fig 2). The decline in ARPUs was attributable to lower roaming revenue, reduction in Mobile Termination Rate and dilution from entry-level Hotlink Flex. Nonetheless, Maxis’ 1Q20 core net profit was 4.7% higher qoq due to lower staff, operation & maintenance costs.

Cutting DPS Forecasts, Maintain SELL With An Unchanged PT of RM4.55

We have tweaked our 2021-22 EPS forecasts by 0.4% to 0.8% on higher interest income. As we now expect its payout to track its earnings, we have lowered our 2020-22 DPS forecasts, assuming a 100% payout ratio instead of a fixed 20 sen DPS per annum. We made no changes to our SELL rating or DCF-derived 12-month price target of RM4.55.

Broadly, we expect the Covid-19 pandemic and MCO to affect Maxis’ nearterm profitability (lower prepaid ARPU) and the ensuing weak economic conditions to affect its 2020-21E ARPUs due to cautious consumer/ business spending. Besides, high operating costs (ie, traffic, commission costs, and allowance for doubtful debts) would also weigh on its profitability.

At 30x 2020E PER, Valuation Looks Pricey

At a 30x 2020E PER, Maxis is trading at 1 standard deviation above its 9-year average and looks pricey to us, considering its weak earnings outlook, declining dividend and the weak domestic economic conditions. Key upside risks are stronger service revenue growth/earnings and value-accretive M&As.

Source: Affin Hwang Research - 27 Apr 2020