• Maxis reported a weaker 2Q20 core net profit of RM338m (-6% qoq) due to a 2.2% decline in service revenue and higher network and staff expenses, partly cushioned by lower device costs.
• The results were within market and our expectations. Cumulatively, Maxis’ 6M20 core net profit of RM698m (-12% yoy) accounts for 48% of street and 50% of our full-year earnings forecasts.
• Considering the difficult business environment during the lockdown period, Maxis’ 2Q20 operational and financial performances were, in our view, commendable. Maintain HOLD with an unchanged 12-month PT of RM5.65.

2Q20 core profit fell 6% qoq to RM338m; DPS unchanged at 4 sen

Against a challenging business environment during the MCO / CMCO period, Maxis delivered a rather solid set of results: 2Q20 core net profit fell by 6.1% qoq to RM338m due to: (i) lower mobile service revenue of RM1.66bn (-2.2% qoq); (ii) higher network, staff and resources expenses (+12-13%); and (iii) higher allowance for doubtful debts (+19% to RM118m). This was partly offset by lower device cost, and operating & maintenance expenses. Notwithstanding a lower core net profit, Maxis has maintained its quarterly dividend of 4 sen per share.

6M20 core net profit of RM698m (-12%) was within market and our expectations

Cumulatively, Maxis’ 6M20 core net profit fell by 12% yoy to RM698m due to lower mobile service revenue and higher operating costs. The decline in mobile service revenue (-5.7% yoy to RM3.36bn) was due to lower contribution from the wholesale segment following a cut in the mobile termination rate, lower roaming revenue and decline in postpaid ARPU. Elsewhere, the group reported a spike in allowance of doubtful debts in 6M20 (+256% yoy to RM217m). Overall, the results were within market and our expectations. Maxis’ 6M20 core net profit accounted for 48% of the street and 50% of our full-year earnings forecasts.

First sequential increase in active prepaid subscriptions since 2Q15

In 2Q20, Maxis’ postpaid subscriptions declined by 0.4% qoq to 3.405m while its ARPU fell by RM1 to RM85 (-RM6 yoy) due to lower international outbound roaming and dilution from entry point Hotlink Postpaid. Elsewhere, its active prepaid subscriptions increased by 1.6% qoq to 5.975m due to significant subscriber adds in June 2020 due to pent-up demand (Maxis saw lower active postpaid subs in April-May 2020) and new product (Prepaid Unlimited plan) launched on 4 June 2020. In 2Q20, Maxis’ prepaid ARPU (for active users) increased by RM1 qoq to RM40.

The fibre business continues to gain traction while enterprise business was stable

In the fibre segment, Maxis maintained its growth momentum, adding 19k subscribers in 2Q20, raising its total fibre subscriptions to 411k connections. Fibre ARPU fell by RM3 qoq to RM106 (unchanged yoy). Management shared that during the MCO period, new households preferred the entry-level packages which diluted its ARPU. However, the demand for superfast fibre packages (300Mbps, 500Mbps and 800Mbps) has returned during the RMCO period.

Elsewhere, the 2Q20 service revenue from Maxis’ enterprise services fell by 2% qoq to RM127m due to business disruptions during the MCO / CMCO period. Nonetheless, the enterprise services’ revenue remained elevated compared to 2Q19 (+84% yoy) and management expects the demand to pick up in 2H20.

Maintain HOLD with an unchanged PT of RM5.65

We maintain our earnings forecasts, HOLD rating and DCF-derived 12-month price target of RM5.65. At 29x 2021E PER, Maxis is now trading at 0.5 standard deviation above its 8-year average PER of 27x, which looks fair to us, considering the ample market liquidity and its relative earnings stability compared to other businesses. For exposure to the telecommunication sector, Maxis is our relative preference for its superior network infrastructure, positive 2021-22E earnings outlook and first-mover advantage in developing converged solutions for individuals, homes and businesses.

Key upside risks to our HOLD call are stronger service revenue/earnings growth and value-accretive M&As. Downside risks include intensifying competition and higher-thanexpected upfront costs for 5G spectrums.

Source: Affin Hwang Research - 24 Jul 2020