We are maintaining our NEUTRAL view on the Telecommunication sector. Followed the award of 2.6GHz spectrum, celcos will likely to unveil their respective LTE services roadmaps in the coming weeks or months, where we believe online video service could be a key focus, even as the local 4G eco-system is not well prepared yet. Data traffic is expected to rise tremendously when the 4G eco-system is in place and this will ultimately benefit the network backhaul providers (i.e. Telekom Malaysia ('TM') and Time dotCom) in the long run due to the  higher data offloading demand. As for the access pricing review, we are having lesser concerns now as compared to a month ago after attending the briefing conducted by MCMC recently. Thus, we have raised our target prices for both TM (OP, TP: RM6.50 (from RM6.25 previously) and Axiata (MP, TP: RM6.50 (from RM6.10 previously) based on higher targeted FY13 EV/EBITDA ratios of 7.9x and 8.0x respectively. Our Maxis (MP, TP: RM7.00) rating and target price remained unchanged meanwhile due mainly to its sluggish earnings outlook despite the regulation cloud being removed. In addition, we have also maintained our Digi (MP, TP: RM4.95) call given the muted earnings impact from the proposed access pricing review to it as per management's guidance and the lack of any near-term share price catalysts. 

3QFY12 results snapshot. Local telco players posted a mixed 3QCY12 results. Axiata is the only incumbent which recorded a better-than-expected result due to the higher turnover at its key operating companies and higher associates contributions. Digi and TM's results, meanwhile, were within expectations while Maxis continues to fail to deliver due to sluggish revenue growth and EBITDA margin compression as a result of higher device sales. 

Lesser concerns on the access pricing review. We understand that the public inquiry for access pricing has ended in mid-November and MCMC is expected to release its findings in December. All the telco players will then have another opportunity to review the access pricing scheme again before the authority decides on the final mandated the prices in 1QCY13. The key rationales to conduct an access pricing review are to enhance telcos efficiency and lower interconnection rate, thus benefit to the subscribers. Nevertheless, this does not mean that the authority has an intention to penalize the telco players. In fact, the mandated prices will likely to be concluded at neutral to slightly negative from telco perspective, according to MCMC. 

2G and 3G spectrum's re-farming could come in latter rather than earlier.  While there is a need to re-farm the spectrum to enhance the efficiency by all telcos, the re-farming exercise is likely to come in latter rather than earlier. Reasons being are 1) the entire spectrum group has yet to expire although some of the individual company spectrums may expire. This means, for example, the 900MHz spectrum re-farming will only take place after January 2015 despite Maxis' 900MHz expiring soon at end -2012; and 2) the re-farming exercise will only commence should ALL the subscribers (under the particular spectrum, i.e. 2G) migrated to other spectrums (i.e. 3G platform).          

Award of the 2.6GHz spectrum.  MCMC has finally announced the allocation of the much anticipated 2.6 GHz spectrum band to eight players. While the sequence of the spectrum bandwidth remains vague at this juncture, we expect the spectrum awardees to further collaborate with their bandwidth neighbours to further enhance their spectrum efficiency. All the mobile operators had earlier indicated that their networks were ready to deploy LTE services, of which Celcom and Maxis have committed to roll out 4G services over the next three to six months in the Klang Valley, Penang, and Johor. We believe the remaining incumbents will unveil their respective 4G services soon.  

Optimal capital structure remains a wild card to fuel capital management. While all the telco incumbents are set to record dividend yields of 3.7%-6.2% in FY13, we do not discount the possibility that the industry players  could potentially reward their shareholders further via optimizing their capital structure. Based on our observation, TM tends to raise the highest cash/share of 46.4 sen followed by Axiata (37.0 sen), Maxis (27.4 sen) and Digi (9.6 sen) should they opt to achieve their own respective maximum optimal capital structure. 

Source: Kenanga