Maintain  UNDERWEIGHT  on  sector  as  valuations  are  not  cheap  amid risk  of  rising  bond  yields.  We  expect  the  sector  to  remain  quiet  until year-end,  as  key  events  such  as  Axiata’s  tower  monetisation  and  the possibility of  DiGi using a business trust may likely materialise only in 2014.  Meanwhile, Maxis’ new CEO  Morten Lundal will likely take some time to assess and strategise Maxis’ future direction. 

- Respite  for  now.  The  US  Fed’s  decision  to leave  the  QE programme untouched  for  now  offers  a  short-term  respite  but  we  think  sector valuations could  still  face downward pressure from rising bond yields, if the  US  Fed  decides  to  start  tapering  its  bond  buying  programme  in 4QCY13.  Higher  bond  yields  will  translate  into  a  higher  risk-free  rate, leading  to  lower  DCF  valuations.  However,  we  believe  the  sector’s fundamentals remain sound.

- Unexciting earnings growth expected for FY13. We maintain our view that the overall earnings growth for the sector will be challenging,  with flat growth expected for FY13. This will primarily be  weighed by negative earnings  growth  (FY13:  -6.7%)  from  Axiata,  caused  by  a  slip  in subsidiary  XL  Axiata’s  revenue  market  share  and  competition  from smaller  operators  in  Indonesia.  TM  is  expected  to  record  flat  growth (+0.9%) due to  less  last mile-tax incentives  of MYR157m estimated for FY13  (FY12:  MYR188m).  While  we  expect  Maxis  and  DiGi  to  both achieve low but steady earnings growth of 2-3% in FY13, our forecasts for Maxis  have  not imputed  the career transition scheme costs that will have a one-off negative impact on 3QFY13 earnings.

- CY14 could be an eventful year.  We believe there is a chance that the sector will see a  re-rating next year, as the market may start pricing in the possibility of the mobile operators passing on the prepaid service tax to  consumers  upon  the  implementation  of  the  goods  and  services  tax (GST)  –  believed to be around 4.0-5.0% and likely to begin  from 2015. Currently,  mobile  operators  are  still  absorbing  the  6.0%  service  tax applicable to prepaid customers. 

- DiGi  benefits  most  from  GST.  DiGi  is  seen  to  be  the  biggest beneficiary,  as  we  estimate  about  65.0%  of  its  revenue  comes  from prepaid  users,  followed  by  Celcom  (50.0%)  and  Maxis  (45.0%).  Our scenario  analysis  indicates  sharp  rises  of  6-12%  in  our  FVs  for  the mobile players if the 6.0% service tax is no longer absorbed,  mainly due to the significant earnings boost (10-15% in FY15).

- Risks.  The risks to our view include: i) lower-than-expected bond yields, ii) stronger-than-expected subscriber additions, iii) better-than-expected execution (such as network upgrades and expansion), and iv) a benign pricing environment.

Source: RHB