KEY INVESTMENT HIGHLIGHTS

• 3Q20 normalised earnings sustained at RM364m (+0.8%yoy) despite a -3.2%yoy dropped in revenue

• Cumulative 9M20 normalised earnings came in at RM1,062m (-8.1%yoy), in-line with our expectation

• No let up in capital spending to maintain its network supremacy

• Fibre and enterprise segments expected to the main key earnings growth driver

• Upgrade to NEUTRAL with an unchanged TP of RM4.45

Resilient 3Q20 normalised earnings. Maxis’ 3Q20 normalised earnings remained resilient at RM364m, a marginal increase of +0.8%yoy. This was mainly attributable to lower depreciation and amortization cost (-6.4%yoy) and lower finance cost (-8.7%yoy). Nonetheless, revenue declined by -3.2%yoy to RM2,213m as a result of lower device revenue (-22.4%yoy). On a positive, we note that the service revenue has remained resilient at RM1,940m despite the diminution in wholesale revenue.

In-line with expectation. Cumulatively, 9M20 normalised earnings contracted by -8.1%yoy to RM1,062m, mainly affected by the lower contribution from wholesale segment which garner better profit margin. Maxis’ 9M20 financial performance came in within ours and consensus expectations, accounting for 72.4% and 73.0% of full year FY20 earnings estimates respectively.

Postpaid ARPU remains under pressure. The postpaid revenue for 3Q20 came in -1.4%yoy lower at RM945m. While the postpaid subscriber base has expanded by +6.8%yoy to 3.5m, the ARPU has reduced to RM84/mth (vs 3Q19: RM90/mth). The latter was caused by reduced international outbound roaming and dilution from entry point Hotlink Postpaid. Moving forward, we expect the dilution in ARPU to persist in anticipation of higher proportion of entry point Hotlink Postpaid subscriber. This could, however, be partially offset by on-going effort to upsell its subscribers to higher plan packages.

Sequential uplift in prepaid revenue. 3Q20 prepaid revenue declined by -9.7%yoy to RM717m. This was mainly driven by contraction in prepaid subscriber base to 5.9m (-6.6%yoy) and lower prepaid ARPU of RM40/mth (3Q19: RM41/mth). However, on a sequential basis, there has been a an increase of +4.5%qoq due to the positive traction from the new prepaid price plans launched in June 2020 and pent up demand from 2Q20. Given that Maxis’ prepaid ARPU is relatively higher as compared to its peers, we expect the addition of new subscribers could be muted in the foreseeable term.

Continuous growth in fibre revenue. 3Q20 fibre revenue improved by +24.3%yoy to RM138m. This was mainly supported by higher fibre connections of 424k (+23.3%yoy) as the uptake for the MaxisONE Prime converged packages remains encouraging. However, due to higher proportion of entry level fibre plan, the home fibre ARPU reduced to RM104/mth from RM108/mth as at 3Q19. Moving forward, we expect the ARPU remains above the RM100/mth level in view of the upselling efforts to higher speed packages.

Defending its network supremacy. 3Q20 capex surged by +31.8%yoy to RM319m. This led to 9M20 capex of RM741m (+16.5%yoy). There is no let up in capital spending to maintain its network supremacy which has been the group’s main competitive advantage. Premised on this, we expect 4Q20 capex to surge in a similar manner as seen in 4Q19. To recall, 4Q19 capex rose by +138.4%qoq to RM577m.

Impact on earnings. No change to our earnings estimates at this juncture.

Dividend. Maxis declared 3Q20 dividend of 4sen, in-tandem with the quantum seen in 1H20. This brings its 9M20 dividend to 12sen versus 9M19 of 15sen. We view that the lower dividend declared was mainly in view of the weaker earnings performance as well as heightened effort to improve cash reserve.

Target price. We are maintaining our target price of RM4.45. This is based on pegging unchanged forward PER of 21x to FY21F EPS of 21.2sen. Our target PER is the group’s two years historical low PER.

Upgrade to NEUTRAL. Maxis’ earnings generation capability has been negatively impacted by the lower wholesale income from Umobile. However, in the recent quarters the group has been proactively regaining the loss ground by being more competitive in its offerings. The fibre segment has been performing exceptionally well, though the contribution to the group is still small at this juncture. Meanwhile, we understand that one of the group’s main focuses is currently on growing the enterprise business segment which we believe is still loss-making at this juncture. Nevertheless, we expect a shorter gestation period for this segment in view of the group’s strategic tech and business partnerships as well as the on-going talent acquisition drive. Another of our concern is on the postpaid segment; due to the increasing proportion of entry point Hotlink postpaid plan which would dilute the postpaid ARPU. On a separate note, the group’s is putting more efforts to improve its cash generative capability, which will inevitable affect their dividend payment and thus the dividend yield. All factors considered, including the retracement of its share price, we are upgrading our call recommendation for Maxis to NEUTRAL from SELL previously.

Source: MIDF Research - 26 Oct 2020