KUALA LUMPUR (Oct 26): MIDF Research has upgraded its rating of telco Maxis Bhd to "neutral" from "sell", with an unchanged target price (TP) of RM4.45, as the group’s earnings for the third quarter ended Sept 30, 2020 (3QFY20) were in line with the research house's expectations.

MIDF said in a note today that Maxis’ normalised earnings remained resilient at RM364 million, a marginal increase of 0.8% year-on-year (y-o-y), mainly attributable to lower depreciation and amortisation cost, as well as lower finance cost.

However, cumulatively, normalised earnings for the nine months ended Sept 30, 2020 (9MFY20) contracted by 8.1% y-o-y to RM1.06 billion, mainly affected by a lower contribution from the wholesale segment which garnered a better profit margin.

“Maxis’ 9MFY20 financial performance came in within our and consensus expectations, accounting for 72.4% and 73% of full FY20 earnings estimates respectively,” it said.

MIDF also noted that the group’s earnings-generation capability had been negatively impacted by lower wholesale income from U Mobile; however, in the recent quarters, the group proactively regained the loss ground by being more competitive in its offerings.

“Besides, the company’s fibre segment has been performing exceptionally well, though its contribution to the group is still small at this juncture,” it said.

Meanwhile, MIDF understood that one of the group’s main focuses currently is on growing its enterprise business segment, which the research house believes is still loss-making for now.

“Nevertheless, we expect a shorter gestation period for this segment in view of the group’s strategic tech and business partnerships as well as its ongoing talent acquisition drive,” it said.

Another concern of the research firm is the company's post-paid segment as an increasing proportion of entry-point Hotlink post-paid plans would dilute post-paid average revenue per user (ARPU).

“Moving forward, we expect the dilution of ARPU to persist in anticipation of a higher proportion of entry-point Hotlink post-paid subscribers. This could, however, be partially offset by ongoing efforts to upsell its subscribers higher[-priced] plan packages,” said MIDF.

On a separate note, the company is said to be increasing its efforts to improve its cash-generative capability, which would inevitably affect dividend payment and thus dividend yields.

“We view that the lower dividend declared [recently] was mainly in view of the weaker earnings performance as well as heightened efforts to improve cash reserves,” said MIDF. It also expects Maxis' 4QFY20 capex to surge in defending its network supremacy — a similar manner as seen in 4QFY19.

At the time of writing today, Maxis' share price was four sen or 0.8% lower at RM4.94, valuing the company at RM38.96 billion.