Maintain neutral: Operationally, 2019 was a good year for Maxis Bhd as it grew its cellular subscriptions while DiGi.Com Bhd and Celcom Axiata Bhd skidded. Financially, however, Maxis fared the worst with a 15% decline in 2019 core net profit. In 2020, we expect fortunes to turn when Maxis’ service revenue outpaces its costs increase, translating into higher earnings, while DiGi and Telekom Malaysia Bhd (TM) see earnings dips due to declining service revenues. Overall, we are “neutral” on the telecommunications (telecom) sector, but its lacklustre growth is compensated by dividend yields of 3-4%.
In the fourth quarter of 2019 ended Dec 31 (4Q19), Maxis grew its cellular subscriptions by 3.2% year-on-year (y-o-y) while Celcom’s shrank by 7.8% y-o-y and DiGi’s was 3.3% lower. Maxis’ outperformance was, in our view, driven by its strong branding in the post-paid segment and its active marketing push for entry-level post-paid packages. Despite declining post-paid average revenue per user, Maxis’ ex-wholesale service revenue reported three consecutive quarters of growth due to an increase in the number of subscribers.
The sector’s core earnings recovered from a dismal RM2.8 billion in 2018 to RM4.9 billion in 2019, driven by Axiata Group Bhd’s earnings turnaround and TM’s near-record earnings arising from its commendable cost-optimisation initiatives. But Maxis and DiGi reported lower profits due to lower service revenue (Maxis and DiGi) and higher operating or depreciation charges (Maxis). Ironically, Maxis has outperformed its peers in terms of revenue growth (for Malaysia operations) but underperformed on earnings realisation due to high upfront costs relating to its aggressive expansion plans.
Maxis gave its first positive earnings guidance in recent years, expecting a flat to single-digit increase in its 2020 earnings before interest, taxes, depreciation and amortisation (Ebitda). On the flip side, DiGi expects its 2020 Ebitda to be flat to a low single-digit decline. The contrast is, in our view, due to the differences in their investment cycles where Maxis anticipates its service revenue growth (partly driven by the enterprise segment) to outpace increase in costs while DiGi may incur higher device and network costs to grow its post-paid market share. Elsewhere, TM expects lower revenue and gave cautious 2020 earnings before interest and tax guidance of “over RM1 billion”. Meanwhile, Axiata remained positive and guided for 4-5.5% growth in 2020 Ebitda.
The sectors’ uninspiring earnings trajectory is somewhat cushioned by its relative earnings resiliency during times of heightened economic uncertainty, relatively lower foreign shareholdings and dividend yields of 3-4%. Maxis (“hold”) is our preferred pick on a relative basis for its superior network infrastructure, positive earnings outlook, stable dividend and first-mover advantage in developing converged solutions for individuals, homes and businesses. — Affin Hwang Capital, March 9