Result

• Maxis reported a normalised PAT of RM360m in 1Q20, which grew 4.7% qoq but declined 11% yoy. The QoQ improvement was mainly due to lower traffic, commission & other direct costs and staff cost, despite quarterly revenue falling 10% QoQ and 5% YoY to RM2.34b.

Comments

• Lower revenue due to COVID-19 – Lower revenue was recorded in 1Q20 mainly due to decrease in service revenue of RM1.94b (-2.6% QoQ and -0.4% YoY) and lower device revenue of RM377m (-35% QoQ and +43 YoY) despite higher fibre and enterprise revenue.

• Slight decline in postpaid revenue. Postpaid subscribers grew 1.4% qoq and 13.7% yoy, spurred by migration from Prepaid. Postpaid ARPU was lower at RM86 due to loss of roaming income as a result of COVID-19. The segment registered revenue of RM984m (-0.5% QoQ and -1.6% YoY)

• Prepaid revenue continues to fall – Decline in prepaid subscribers accelerated to 5.5% qoq and 9% yoy due to challenges in physical retail channels amid COVID-19. Prepaid ARPU was lower at RM39 (vs RM42 in 4Q19. As a result, Prepaid revenue decreased 8.8% QoQ and 10.4% YoY to RM714m.

• Results slightly below expectation. 1Q20 normalised PAT achieved 22% of our full year forecast while revenue accounted for 26% of our FY20 estimate.

• Lower gearing. Net debt/EBITDA eased to 2.18x (vs 2.24x in 4Q19) due lower capex investment of RM163m vs RM577m in 4Q19.

• Lower dividend declared. Maxis declared its first interim dividend of 4 sen/share, which is lower than 5 sen/share previously. Our full year dividend forecast stands at 20 sen, which translates into a dividend yield of 3.7%.

• Management withdrawn its guidance for 2020: Given the uncertainties and challenges arising from COVID-19, the management has withdrawn its FY20 guidance until there is more clarity over the impact of the pandemic. To recap, its previous guidance are: a) service revenue to be flat or grow by low single digit, b) Normalised EBITDA to be flat or grow by single digit, and c) Base capex of RM1b.

• Major risks for the stock include: a) Strong competition from other telcos, b) Higher-than-expected capex investment c) Change in regulatory risk and d) Potential lower full year dividend.

Earnings Outlook/Revision

• We maintain our earnings forecast due to the improved COVID-19 situation in Malaysia and earnings recovery to kick off in 2H20.

Valuation & Recommendation

• Maintain SELL with an unchanged target price of RM4.85, based on DCF valuation (WACC of 7.8% with a long term growth rate of 2.7%). Our target price implies 24.8x FY20F PE based on EPS of 21.4 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 3.8%.

Source: JF Apex Securities Research - 27 Apr 2020