We maintain UNDERWEIGHT on the sector as valuations are not cheap amid rising bond yields. 2Q was another satisfactory quarter, with some positive surprises in margins. We believe consensus’ FY13 earnings estimates are unlikely to change materially, except for Axiata, which is facing  short-term  headwinds  due  to potential  translation  losses  from a weakening rupiah.

- Satisfactory  2QCY13.  Four  of  the  five  companies  under  coverage  -  Axiata,  Maxis,  DiGi,  TM  –  posted  results  that  were  within  our expectations,  except  for  TdC,  which  outperformed  due  to  better-than-expected  margins  boosted  by  opex  efficiency  and  revenue  from  a  non-recurring  node  fiberisation  contract.  We  believe  our  and  consensus’ FY13  EPS  estimates  are  unlikely  to  change  materially  following  the 2QCY13  results,  which  were  mostly  in  line  with  expectations.  However, we  think  consensus  may  tweak  earnings  lower  for  Axiata  after management cautioned that meeting its EBITDA growth guidance could be more challenging now due to forex volatility.

- Sequential  revenue  growth  somewhat  tepid.  The  sector’s  overall sequential revenue growth was generally tepid in 2Q as service revenue growth  did  not  really  pick  up  following  a  seasonally  weaker  1Q  amid weaker handset sales. Going forward, we believe the sector’s sequential revenue  growth  will  largely  depend  on  continued  efforts  to  monetise data.

- Better  EBITDA  margins.  The cellcos’  costs  were  well  managed  in  2Q but the strength of the fixed line players was a positive surprise. Besides cost controls,  we believe the lower interconnect rates  contributed to the latter’s positive performance.

- Outlook. Based on the 2Q13 results, we believe the industry remains on track for mid-single digit revenue growth in 2013, underpinned by strong data growth. However, we believe that voice revenue will still struggle to stay stable in 2013 as mobile operators continued to post low single digit y-o-y  declines  in  voice  revenue  in  2Q13  due  to  ongoing  voice-to-data migration. There were no changes to guidance or KPIs (key performance indicators) by the telcos. 

- Maintain  UNDERWEIGHT  on  sector.  We  maintain  our UNDERWEIGHT  stance  on  the  sector  due  to  a  lack  of  catalysts  while valuations  remain  stretched  amid  a  rising  bond  yield  environment.  We believe  there  is  little  dividend  upside  within  the  sector  in  the  short  term with the exception of DiGi, which will decide whether to go ahead with a business trust structure (to allow for potentially more dividends to be paid out) by year-end.

Source: RHB