• Still NEUTRAL, lower DCF-derived MYR3.98 TP from MYR4.45, 5% upside, c.5% yield. Maxis’ 1Q22 results were broadly in line. We lower our DCF-derived TP after incorporating a higher cost of equity assumption, on rising inflationary expectations. Despite the significant underperformance YTD, we see little notable share price catalysts, with earnings prospects likely to be stymied by the 5G single wholesale network (SWN) and uncertainties with respect to its converged aspirations. Our TP reflects a 2% ESG premium.

• 1Q22 core earnings rose 3.1% QoQ on lower depreciation post 3G network shutdown, partially offset by higher tax expenses (prosperity tax impact). This formed 25% of our forecasts (consensus: 23%). A first interim 5 sen DPS looks to be a step up from the typical 4 sen run-rate quarterly, reflecting a 131% payout. A results call is scheduled this morning.

• Service revenue and EBITDA flat QoQ. Maxis has overhauled its revenue disclosures with distinct consumer and enterprise breakdowns. The reclassifications have nonetheless distorted comparables. Overall service revenue advanced 3% YoY but was flat QoQ (-0.7% QoQ), with stronger home/fiber revenue mitigating the weakness in mobile revenue. Revenue from the consumer business (mobile and home connectivity) gained 2.4% YoY (+1.5% QoQ), off the low base of population restrictions in 1Q21, and supported by the 21.2% growth in home revenue. Prepaid revenue recovered, up a marginal 0.3% QoQ on higher prepaid ARPU (+2.7% QoQ) from the clean-up of its inactive prepaid subs base (-4% QoQ), while postpaid revenue inched up by 1.2% QoQ on higher take up of entry-level Hotlink plans. Consumer revenue made up 85% of overall mobile revenue in 1Q22.

• Enterprise revenue (includes mobility) at 19% of service revenue. Enterprise sales grew 5.4% YoY (-3% QoQ), driven largely by the fixed and solutions segment (+8% YoY), with mobile revenue up 2.8% YoY (48% of enterprise revenue). Maxis’ enterprise postpaid subs was flat QoQ at 0.64m.

• TP cut on rising bond yields. Despite the >20% share price de-rating YTD (the worst performing ASEAN-4 telco), we see little notable re-rating catalysts, with earnings prospects likely to be stymied by the 5G SWN model. The higher index weightage accorded – post the merger of its rivals – would also come at the expense of Maxis, in our view. Our DCF TP is lowered to MYR3.98 after factoring in a higher risk-free rate assumption of 4.25% (vs. 2.9%) from the rise in bond yields. Downside risks include competition, earnings, and regulatory setbacks. We see its enterprise business as the wildcard, clouded by the 5G SWN model which could portend challenges in rolling out enterprise solutions and impair the group’s converged aspirations. A key differentiating factor – its superior/premium network – is also threatened by the SWN, where 5G spectrum resources are shared with peers.

Source: RHB Research - 29 Apr 2022