INVESTMENT HIGHLIGHTS

• Quarterly earnings continue to slip, declining by -0.4%yoy to RM480m in view of lower service revenue

• 1HFY19 normalised earnings of RM990m came in within ours and consensus expectations

• Quarterly dividend maintain at 5sen per share, in-line with expectation

• Maintain SELL with an unchanged target price of RM4.68

Resilient 2Q19 normalised earnings. Maxis’ 2Q19 normalised earnings reduced slightly by -0.4%yoy to RM480m. This was mainly attributable to: i) lower prepaid RGS, ii) overall reduction in ARPU and, iii) termination of a network sharing agreement. This lead to 1HFY19 normalised earnings of RM990m. All in, 1HFY19 financial performance came in within ours and consensus expectations, accounting for 48.5% and 48.6% of full year FY19 earnings estimates respectively.

Slide in postpaid ARPU. 1H19 postpaid service revenue declined marginally by -1.1%yoy to RM1,972m. This was mainly due to lower ARPU of RM91 (-4.2%yoy) in view of the change in the mobile termination rate. Fortunately, the decline in ARPU was partially offset by largest subscriber base of 3,104k (+10.8%yoy).

Consolidation in prepaid segment. 1H19 prepaid service revenue declined further by -6.8%yoy to RM1,588m. This was mainly impacted by lower prepaid subscriber base of 330k in view of continued SIM consolidation and migration to postpaid. Meanwhile, ARPU remained stable at RM41/mth.

Dividend. The group maintained its quarterly dividend of 5sen for 2Q19. This is in-line with our full year FY19 dividend of 20sen.

Capital expenditure (capex). 2QFY19 capex increased by +25.9%yoy to RM267m (2QFy18: RM212m). The spending was primarily on: i) improving redundancy of fibre network for better quality and service, ii) investment in network capacity rollout and, iii) investment in network to be 5G ready. Cumulatively, the group’s 1HFY19 capex amounted to RM394m, an increase of +23.5%yoy.

Target price. We are maintaining our target price to RM4.68. This is based on pegging unchanged forward PER of 20.6x to FY22.7F EPS of 22.7sen. Our target PER is the group’s two years historical low PER.

Maintain SELL. We view that the diminishing income from U Mobile has greatly affected the group’s profit margin and, subsequently, earnings. This is further impacted by the repricing of Home Fibre as well as declining prepaid service revenue. To regain the loss in revenue, the group is repositioning itself to become a converged communications and digital services company. This would include aggressively growing the enterprise business segment. However, we view that there are gestation period before it could substitute the loss of income from U Mobile. Coupled with competition from its peers, we do not expect the group to be able to offset the loss of contribution from Umobile organically in the near term. Meanwhile, we expect the Maxis’ dividend yield to remain below 4% to focus on executing its new strategy. All factors considered, we are maintaining our SELL recommendation.

Source: MIDF Research - 5 Aug 2019