Result

• Maxis reported a normalised PAT of RM364m in 3Q20, which rose 0.8% yoy and 7.7% qoq due to lower allowance for doubtful debts of RM48m (vs RM118m in 2Q20) and cost efficiency.

• Steady service revenue – Quarterly revenue dropped 3.2% YoY RM2.21b due to lower device revenue of RM250m (-22% YoY) but rose 3% QoQ as all segments improved except Postpaid. Meanwhile, Service revenue (excluding device and network) was flat YoY and climbed 2% QoQ.

• Resilient EBITDA margin –Maxis achieved a normalized EBITDA margin of 41.8% with EBITDA at RM924m (-4.1% YoY and +2.3% QoQ).

• Lower postpaid revenue - Postpaid subscribers increased 1.4% qoq and 6.8% yoy to 3.45m. However, Postpaid ARPU was slightly lower at RM84 (vs RM85 in 2Q20) 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 lower revenue of RM956m (-1.8% QoQ and -2.3% YoY).

• Prepaid gained traction – Maxis saw its prepaid subscribers drop to 5.91m (-1.1% qoq and -6.6% yoy) while Prepaid ARPU was slightly higher at RM40 vs RM39.6 in 2Q20. As a result, Prepaid revenue increased 4.5% QoQ but dropped 9.7% YoY to RM717m.

• Higher gearing. Net debt/EBITDA inched higher to 2.29x (vs 2.26x in 2Q20) due lower cash reserve of RM606m vs RM662m in 2Q20.

• Dividend declared. Maxis declared its third interim dividend of 4 sen/share, taking total dividend declared so far to 12 sen. Our full year dividend forecast stands at 16 sen, which translates into a dividend yield of 3.2%.

Earnings Outlook/ Revision

• Results slightly below expectation. 9M20 normalised PAT of RM1.06b (-8% YoY) achieved 64% of our full year forecast while nine months revenue of RM6.7b (+1.2% YoY) accounted for 75% of our FY20 estimate.

• We reduce our earnings forecast for FY20 by 5.8% but keeping our revenue estimate. Following the improved COVID-19 situation in Malaysia, we expect earnings momentum to continue into 4Q20.

• 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.

Valuation/Recommendation

• Upgrade to HOLD from SELL with a lower target price of RM4.76 (previously RM4.85), following the recent selldown in share price. Our target price is based on DCF valuation (WACC of 7.4% with a long-term growth rate of 2.7%). This implies 24.7x FY20F PE based on EPS of 20.1 sen.