We are maintaining our OVERWEIGHT view on the Telecommunication sector. The sector’s outlook remains intact in our view judging from the players’ respective 1QFY13 results that came in mostly within expectations and are on track to meet their respective full-year KPIs or earnings guidance. Meanwhile, we believe that the 4G roadmap for celcos will likely get clearer in the 2H given that both Maxis and Celcom are rapidly expanding their respective service coverage while Digi is planning to unveil its plan within the next few weeks. Despite lacklustre YTD share price performances of these players, the sector’s defensive nature and reasonable dividend yield will still be able to provide investors with the muchneeded shelter during the current uncertain period. Valuation-wise, we have trimmed all our big capitalisation telco companies’ targeted standard deviation (“SD”) levels by 0.5x each after taking the following factors into consideration: 1) potentially higher than expected margin pressure, 2) lack of dividend upside in the 3Q and 3) higher market risks. Our big capitalisation telco companies’ target prices have been lowered by 3%-8% after the SD adjustments above, which also implies a lower EV/forward EBITDA multiplier for the sector. Digi (OP, TP: RM5.24 (from RM5.60 previously)) is our top pick in the telco sector. We are reiterating our OUTPERFORM rating on TM (TP: RM5.91 from RM6.48 previously) while keeping our MARKET PERFORM call on Axiata (TP: RM6.72 (from RM6.99 previously). For Maxis, meanwhile, the target price and stock recommendation have been lowered to RM6.94 (from RM7.17 previously) and a MARKET PERFORM rating respectively. There is, however, no change in our OUTPERFORM call and target price on Redtone (TP: RM0.75). 

1QFY13 results snapshot.  Local telco players posted a mixed set of 1QCY13 results. Digi was the only celco that recorded a lower-than-expected result due to its higher handset related expenses as well as competitive IDD pricing. Both Maxis and Axiata’s results came in within ours as well as the consensus estimates. TM, on the other hand, was the only incumbent that posted better than expected results due to its lower operating costs coupled with a better effective tax rate.

Continues to expand 4G services coverage. Both Maxis and Celcom have entered into a rapid network coverage expansion mode for their 4G services that had been launched since early of the year. Maxis is reported to have about  130k 4G users, mainly from the Klang Valley areas. It is aiming to expand its coverage to Penang and Johor from the 2Q onwards. Meanwhile, Celcom has deployed its 4G service on 70 sites located mainly in the Klang Valley with an aim to expand its coverage to 1200 sites nationwide by February 2014. We understand that Celcom’s 4G network was restricted to USB modem users previously but has since been extended to small screen users since mid-June. Digi, on the other hand, is targeting to unveil its LTE roadmap within the next few weeks. We believe celcos will gradually move to tier pricing data plans to maximise their data revenues that are expected to surge noticeably in the future under the 4G wave. 

Key events/catalysts to watch in the 2H. We believe the 2H will be an interesting period for local telco players. Key events/catalysts to watch for Maxis are: 1) updates on its new management team as well as the take-up rate of its Maxis-Astro IPTV service. For Axiata, investors are likely to focus on its: 1) key operating subsidiaries’ competition environment (especially XL Axiata), 2) the regulations issue in Idea Cellular, 3) Celcom’s LTE plan, 4) Fibre plan being bundled with TM’s HSBB and 5) investment in Myanmar. Digi, on the other hand, will see attention on the progress of its Business  Trust formation as well as its on-going network modernisation and collaboration plans. Meanwhile, for TM, a clarification of the competition landscape in its fibre broadband segment as well as lesser concerns on its revenue KPI could provide some re-rating catalysts  to the share price. For Redtone, the events to watch out for the company during the next few months are: 1) its 4QFY13 result, which the group is set to make record-high profits and 2) the bidding outcome of the DTTB contract.

Source: Kenanga