We maintain Neutral on the sector as valuations are not cheap. 1QCY13 was a satisfactory quarter with TM surprising on the upside. Based on the 1Q13 results so far, we believe the industry is on track for mid-single digit revenue growth in 2013. But earnings growth for the sector will be challenging as we  expect flattish growth, primarily dragged down by Axiata. TdC remains our top pick.

-  Satisfactory  1QCY13.  Four  (Axiata,  Maxis,  DiGi,  TdC)  out  of  five companies  under  coverage  were  within  our  expectations,  with  the exception  of  TM,  which  outperformed  primarily  due  to  tax  incentives related to its high-speed broadband investments.  We believe consensus’s FY13 EPS estimates for TM will likely be revised upwards following management guidance that TM’s effective tax rate will only be around 10% due to high-speed broadband related investments. This,  we  believe,  was  largely  unanticipated  as  management’s  prior guidance was for its effective tax rate to normalise towards the statutory 
level in FY13.

-  Sequential  revenue  growth  moderated  as  expected.  Sequential revenue  growth  for  the  sector  moderated  as  expected,  and  was supported mainly by very strong handset sales. Service revenue growth was flattish due to seasonality following the festivities in 4Q12 and the shorter working period in 1Q13.  Following  the  seasonally  soft  1Q,  we  believe  the  sector’s  sequential revenue growth will pick up going forward with emphasis returning to the large screen segment on the back of wider LTE network coverage rollout.

-  Better EBITDA margins. Costs were quite well managed in 1Q and all the  telcos  saw  better  EBITDA  margins,  with  the  exception  of  DiGi. Although DiGi’s 1Q EBITDA margin of 43.7% was below management’s guidance of 46%, management foresees a recovery upon selling less handset bundles going forward.

- Outlook. Based on the 1Q13 results so far, we believe the industry is on track for mid-single  digit revenue  growth in  2013. We note that  voice revenue may struggle to remain stable in 2013 due to low-to-mid single digit y-o-y declines in 1Q13, but it is still early days. Growth in the fibre market  remains  quite  strong  as  UniFi’s  subscriber  growth  momentum remains largely intact. Earnings growth for the sector will be challenging as we expect flattish growth, primarily dragged down by Axiata.  

- Neutral on sector. We only  have  a  Buy  call  on  TdC  for its  cheaper valuations compared to its domestic peers and strong growth prospects in the regional bandwidth business.

Source: RHB