Result

• Maxis reported a normalised PAT of RM338m in 2Q20, which declined 13.6% yoy and 6.1% qoq, mainly due to lower traffic, commission & other direct costs and staff costs. The QoQ improvement was achieved despite quarterly revenue falling 10% QoQ and 5% YoY to RM2.34b.
• Lower revenue due to COVID-19 – Lower revenue of RM2.15b (-8% QoQ and -2.5% YoY) was recorded in 2Q20 mainly due to lower device revenue of RM229m (-39% QoQ and -15% YoY) despite resilient service revenue of RM1.9b (-2.1% QoQ and -0.9% YoY).
• Resilient EBITDA margin – Despite lower revenue, Maxis achieved a normalized EBITDA margin of 42% with EBITDA at RM903m (-1.8% QoQ and -4.6% YoY).

• Steady postpaid revenue - Postpaid subscribers declined 0.4% qoq but grew 9.7% yoy to 3.4m, spurred by migration from Prepaid with the launch of Hotlink Postpaid. Postpaid ARPU was slightly lower at RM85 (vs RM86 in 1Q20) due to loss of roaming income as a result of COVID-19 and dilution by entry point plan from Hotlink Postpaid. The segment registered a steady revenue of RM961m (-1% QoQ and +0.2% YoY).

• Higher Prepaid subs – Maxis managed to grow its prepaid subscribers to 5.98m (+1.6% qoq and -6.9% yoy) following a rebound in June as restrictions on physical channels were lifted during RMCO. Prepaid ARPU was steady at RM40 (vs RM93 in 1Q20. As a result, Prepaid revenue decreased 3.9% QoQ and 13.3% YoY to RM686m.

• Results slightly below expectation. 1H20 normalised PAT of RM698m (-12% YoY) achieved 42% of our full year forecast while six months revenue of RM4.5b (+1.2% YoY) accounted for 50% of our FY20 estimate.

• Higher gearing. Net debt/EBITDA inched higher to 2.26x (vs 2.18x in 1Q20) due lower cash reserve of RM693m vs RM948m in 1Q20 (-27% QoQ).

• Dividend declared. Maxis declared its second interim dividend of 4 sen/share, taking total dividend declared so far to 8 sen. Our full year dividend forecast stands at 20 sen, which translates into a dividend yield of 3.8%.

• Cautious on FY20 guidance: Given the uncertainties and challenges arising from COVID-19, the management did not provide new guidance for FY20, which was withdrawn previously, until more clarity is seen.

• Major risks for the stock include: a) Strong competition from a new price war, b) Higher-than-expected 5G capex investment c) Change in regulatory risk and d) Potential lower dividend.

Earnings Outlook/Revision

• We maintain our earnings forecast due to the improved COVID-19 situation in Malaysia and we expect 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 - 24 Jul 2020