Though 1QFY20 normalised earnings of RM360m (-11%) and 4.0 sen interim dividend are deemed within expectations, we cut our FY20E/FY21E earnings in anticipation of poorer subscriber numbers under this MCO period. Management withdrew its FY20 guidance, safeguarding itself with provisions and keeping dividends in check for better cash flows. Maintain MP but with a lower DCF-driven TP of RM4.90 (from RM5.10, WACC: 8.8%, TG: 1.5%).

1QFY20 deemed within. 1QFY20 normalised profit of RM360m is deemed to be in line with our/consensus estimates, making up 22%/23% of respective expectations. An interim dividend of 4.0 sen is also deemed to be as expected, against our 20.0 sen total FY20E payment (in line with 3-year historical trends, ranging from 75-105% payout ratios).

YoY, 1QFY20 total revenue of RM2.34b (+5%) was supported by greater device sales registered against flattish service revenue of RM1.94b (-<1%). Both Prepaid (-10%, from customer migration to Postpaid and loss of wholesale revenue) and Postpaid (-2%, as ARPU skewed towards entry-level products) contributed less, supported by better enterprise and home fibre businesses. As of 1QFY20, Prepaid subscribers stood at 5.88m users with an ARPU of RM39/mth (1QFY19: 6.47m users, ARPU: RM40/mth) while Postpaid subscribers came in at 3.70m users with an ARPU of RM94/mth (1QFY19: 3.25m users, ARPU: RM114/mth). Overall, normalised earnings decreased by 11% to RM360m due to higher cost incurred from devices and more prudent impairments amidst Covid-19.

QoQ, 1QFY20 service revenue was 3% softer from the shift in usage trend in Prepaid and Postpaid as explained above. We reckon customers could also be lost to competitors who offer lower cut-throat prices. Still, as device sales was seasonally lower than 4QFY19 with year-end launches, the group incurred lower product costs, translating to a 5% growth in normalised profits.

Exercising prudency during uncertain times. Given the wave of uncertainty posed by Covid-19 and MCO, management withdrew its previous guidance for a flat-to-low single digit in service revenue and normalised EBITDA. Management expressed that the pandemic could put pressure on its roaming revenue (2-3% of total revenue), migrant subscribers and some risk in payment risks. Henceforth, it was decided that the group exercised prudency and provided for possible doubtful debts while also easing up on dividends to sustain its operating cash flows. On the flipside, management assured prepaid top-ups are still healthy with more subscribers adopting digital methods. Further, an ongoing RM350m productivity program looks to continue to churn cost savings over time. While we believe that putting in place such measures are necessary during such a time, it would not be a new norm for the group given the duration of the MCO relative to the year. We feel a more pressing concern could be subscribers down trading to lower-priced offerings in the market as economic activity slows. This could be even more prevalent with MAXIS products being premium-priced amongst its competitors.

Post-results, we lower our FY20E/FY21E assumptions by 7.2%/6.5%. We decide to tone down our subscriber assumptions, in view of the above. That said, we believe that 1QFY20 safeguards of higher impairments should normalise. We also trim our dividend expectations for FY20E to 18sen (from 20sen) inline with management’s cash conservation efforts.

Maintain MARKET PERFORM with a lower DCF-driven TP of RM4.90 (from RM5.10). While we maintain our DCF assumptions (WACC: 8.8%, TG: 1.5%), our more cautious projections for the stock led to our lower TP. Current price level and target price could also be fair, close within the stock’s 3-year average of its 12.0x EV/Fwd. EBITDA. However, investors may be more vigilant in line with management’s view and with its dividend also being less attractive.

Risks to our call include: (i) higher/lower-than-expected service revenue growth, (ii) lower/higher-than-expected OPEX, and (iii) less/more aggressive competition.

Source: Kenanga Research - 27 Apr 2020