Result

• Maxis reported a normalised PAT of RM795m in 2Q19, which tumbled 3.2% qoq and 18.5% yoy. Meanwhile, quarterly revenue stood at RM2.2b, down 1.2% qoq and 1.8% yoy.
• For 1HFY19, the Group recorded a lower topline (-1.0% yoy) and bottomline (-19.7% yoy).
• Meeting expectations. Overall, 1HFY19 normalised PAT accounts for 45.4%/48.6% of ours/market consensus full year estimate.

Comments

• Lower qoq earnings. Lower revenue was recorded mainly due to weaker mobile revenue (ie. lower Postpaid and Prepaid revenue) which offset higher service revenue from integrated services. As such, lower PBT was recorded, down -1.3% qoq.

• Lackluster yoy performance. Again, lower Prepaid and Postpaid revenue offset higher non-service revenue (ie. device revenue) resulted in slightly lower group revenue (-1.8% yoy). Likewise, higher operation & maintenance expenses and termination of wholesale agreement with Umobile, which resulted in a lower EBIT/EBIT margin of -12.7%/-3.6ppts.

• Disappointing 1H19 earnings. Year to date, the Group revenue was down -1.1% yoy, again, due to lower revenue from Postpaid and Prepaid segment. Also, the Group recorded lower EBIT, no thanks to higher traffic, commission & other direct cost along with higher depreciation costs.

• Weaker revenue from Postpaid segment. Postpaid subscribers grew 3.2% qoq and 4.5% yoy, spurred by Prepaid to Postpaid conversion. However, Postpaid ARPU was down to RM91, -1.1% qoq (-3.2% yoy), due to adoption of FlexPlan.

• Poor performance from Prepaid segment, as expected. Prepaid subscribers inched down -0.8% qoq (-4.9% yoy), impacted by SIM consolidation and migration to Postpaid from Prepaid. Besides that, Prepaid ARPU increased to RM41, 2.5% qoq but down -2.4% yoy.
• Stable gearing. Net debt/EBITDA maintained at 2.21x (2.23x in 1Q19), whilst cash and bank balances increased 22.5% to RM600m QoQ due higher operating free cashflow.
• Dividend declared. As expected, the Group has declared a second interim dividend of 5.0 sen/share, representing 50% of our full year FY19F dividend forecast. We expect similar dividend payment for the coming quarters, translating into dividend yield of around 3.7%.

• Management has guided that: a) FY19F service revenue would decline by low single digit, b) Normalised EBITDA could drop by mid-single digit decline, and c) Capex budget of RM1b, which is in line with our FY19F after the implementation of MFRS 16.
• More collaboration ahead. To recap, Maxis and Gamuda (property developer) signed a memorandum of understanding (MOU) to form a strategic partnership as connectivity and solutions provider to become Malaysia first’s Maxis delivered 5G township for Gamuda Cove in July 2019. Looking forward, Maxis will continue to focus on consumer and enterprise segments by executing new access agreements with access providers. However, we do not expect any significant impact to the Group short term earnings.
• Major risks for the stock include: a) Strong competition from other telco, b) Higher-than-expected expenses from investment in productivity programme c) Change in regulatory risk and d) Lower Postpaid revenue.

Earnings Outlook/Revision

• We revise down our FY19F and FY20F earnings forecast by 7.4% and 7.2% respectively as we foresee lower revenue contributions from Prepaid and Postpaid segments.

Valuation & Recommendation

• Downgrade to SELL from HOLD with a lower target price of RM4.85 (previously RM5.51), based on DCF valuation (WACC of 7.8% with a long term growth rate of 2.7%). Our revised target price implies 23.3x FY19F PE based on EPS of 20.8 sen.

• Our bearish stance on Maxis is mainly due to lack of catalyst to drive its earnings in the short run coupled with unattractive dividend yield of 3.7%

Source: JF Apex Securities Research - 5 Aug 2019