TM’s 2QFY13 results suggest that the group is largely on track to meet its FY13 KPIs. The strength of its EBIT margin is positive surprise, but we expect cost pressures to squeeze margin in 2H. While Management expects  marginally  lower  capex  intensity  in  FY13,  we  believe  TM  will likely keep a tight lid on cash for now. Maintain NEUTRAL. 
 
- Within expectations. TM’s 2Q13 core net profit of MYR245m (+9.6% y-o-y;  +4.5%  q-o-q)  accounted  for  54%  and  57%  of  our  and  consensus estimates  respectively,  which  we  deem  within  both  forecasts  as  we expect TM’s effective tax rate to normalise higher in 2H upon  the expiry of high-speed broadband (HSBB)-related tax incentives by September. 

- Q-o-q  revenue  growth  boosted  by  lumpy  items.  Q-o-q,  the  return  of lumpy contributions from other business (+36.2%) following a seasonally weak  1Q  was  the key  revenue  driver.  There  was decent  growth  in  data (+3.6%)  and  voice  (+6.6%)  but  Internet  was  flat  (-0.9%)  due  to  a reclassification.  EBIT  margin  improved  0.3ppt  q-o-q  to  12.6%  (1Q13: 12.3%)  due  to  lower  interconnect  charges.  Coupled  with  a  higher effective tax rate of 8.2% (1Q13: 3.1%), core PAT rose 4.5%.

- Briefing  highlights.  The strength of TM’s EBIT margin has been a positive surprise but will likely be squeezed in 2H owing to higher labour, content  and  HSBB  maintenance  costs.  TM  has  a  USD465m  bond  due next  year,  which  could  put  a  dent  on  its  FY14  earnings  in  view  of  the current weakness in the MYR. Nonetheless, we note that the group has hedged  about  half  of  this  exposure.  Besides  that,  Management  now expects  lower  capex  intensity  (capex/revenue),  with  a  revised  guidance of 23-24% from 24-25% previously.

- Dividends. An expected interim DPS of 9.8 sen was declared.  

- Forecasts. Maintained.  

- Maintain NEUTRAL.  We remain NEUTRAL on TM, with an unchanged DCF valuation (WACC: 8.1%, TG: 1.5%) of MYR5.30.

Source: RHB