The 3Q13 results of the Asean four telco markets were characterised by acute voice pressure and continued challenges in monetising data. A stock-picking strategy is still favoured amid rising interest rates. We like telcos with discernible catalysts and strong operational momentum. TLKM, ADVANC and TBIG remain our top regional picks while Maxis our top SELL. The recent selldown in Thai telcos offers another good entry point with the structural growth theme intact.

Positive data trends; OTT usurping SMS. Across the four telco markets that we cover, the strong growth in data usage and traffic continued unabated. However, the rising usage of over-the-top (OTT) applications is hurting legacy voice revenues with traditional SMS as the new whipping boy. Telcos continued to find pricing data a challenge which should pressure service revenues. In Singapore, the initial ARPU uplift from tiered data plans appeared to be waning as data users are increasingly cautious on usage.

Tower companies faring well. TBIG and SMN’s decent revenue and earnings momentum reaffirm our positive stance on the communications infrastructure sector in Indonesia. Telkom remains our Top Pick in the Indonesian mobile space, as it continues to gain revenue market share and share price is likely to be further catalysed by the monetisation of its towers in 1H14.

SG telcos offer the best play on capital management. On a 12-month horizon, we see the highest potential for capital management in Singapore given the telcos’ strong FCF yields and under-leveraged balance sheets. M1 and StarHub could see dividend surprises.

TLKM, ADVANC & TBIG remain Top Picks. We remain overweight on the Thai market in view of its structural earnings growth theme and sustained dividends, notwithstanding the competitive headwinds and slowing consumer sentiment. We are UNDERWEIGHT on Malaysian telcos (over valuations), Singapore telcos (lacking strong catalysts) and Indonesia telcos (broader market concerns/FX risk). Our Top Picks reflect investors’ inclination for ‘growth-oriented’ themes as the global macroeconomic environment improves.

Malaysian Telecoms (UNDERWEIGHT)

We remain UNDERWEIGHT on the Malaysian telecoms space due to the sector’s demanding valuations vis-à-vis its regional peers. The telcos are facing headwinds in monetising data with traditional SMS revenues under threat. The notable highlights during the 3Q13 were: (i) a marked erosion in SMS revenue, and ii) the presence of tax incentives which boosted earnings. In the fixed line segment, TM continues to execute well on UniFi, although Maxis managed to capture a slightly higher share of the industry net additions in 3Q13. There is no change to our recommendations on the stocks.

Chugging along

Based on 3Q13 results of the telcos, we believe the industry remains firmly on track for mid-single digit revenue growth in 2013, underpinned by strong data growth. A positive surprise has been the reliance on voice revenue, which has only seen marginal erosion so far (-1% to -3% y-o-y). The sector’s 3Q sequential revenue growth was similar to that of 2Q as service revenue growth was dampened by the erosion in SMS revenue from rising OTT usage. Going forward, we see the sector’s sequential revenue growth to be largely dependent on initiatives to better monetise data. Among the telcos, Celcom appears to be looking to introduce a form of tiered data pricing mechanism sometime in 4Q13. We note, however, that Maxis leads in LTE coverage (~ 10% of the population), although it has no immediate plans to introduce tiered pricing. The success of Celcom’s tiered plans would be an indication of whether the Malaysian market is ready. Tiered data pricing was introduced in Singapore back in 3Q12, with over a third of postpaid subs on tiered data plans.

Minor negative changes to guidance

Although there were two minor negative revisions to Maxis’ and DiGi’s guidance, we did not revise our earnings estimates as we had earlier factored in the potential downside. Maxis lowered its 2013 revenue growth guidance to 2-3% (from mid-single digit), which partly reflects its decision to scale down outright device sales. Meanwhile, DiGi updated its 2013 EBITDA margin guidance and now expects 1-ppt y-o-y dilution (previously stable margins). The key reasons for DiGi’s lower EBITDA margin guidance were weakening IDD margins and higher-than-expected handset sales.

Looking ahead into 2014, we are modeling for stronger earnings growth for the industry (+3%). We expect Axiata and DiGi to both see mid-to-high single-digit earnings growth. Axiata will likely see a turnaround when XL gains better traction amid easing competitive pressures, while DiGi’s earnings will be free of accelerated depreciation with its network modernisation exercise completed in 3Q13. TM, however, will likely see its earnings contract by 12% due to the absence of further tax incentives, after they expired in 3Q13.

Stable EBITDA margins
The celcos’ costs were well-managed in 3Q13 but TM’s margins continued to surprise on the upside (contrary to management’s initial expectation that 2H would see higher staff, content and HSBB maintenance costs). As expected, TdC’s EBITDA margin dipped q-o-q due to the absence of higher-margin non-recurring node fiberisation contracts (a timing issue). In addition, TdC incurred unspecified costs on festoon cable repair works and a MYR0.4m allowance for doubtful debts in 3Q that are unlikely to recur, which implies margins should improve in 4Q13.

Non-voice contribution reaches a plateau

Non-voice revenue contribution as a percentage of mobile revenue appears to have reached a plateau, as mobile internet growth is starting to moderate amid eroding SMS revenue. The lack of device sales in 3Q was another contributing factor, due to the absence of new smartphone launches. Notably, Maxis’ non-voice revenue contribution as a percentage of revenue dropped to 45.3% from 47.6%, as handset sales fell 52.4% q-o-q due to a change in management’s strategy. Maxis intends to continue seeding data growth by offering handset bundles to postpaid users, but is scaling back on outright sales in devices given the thin margins.

TM takes a breather in 3Q13 as Maxis catches up
TM’s UniFi momentum moderated somewhat in 3Q, with just 30k subscribers added (2Q13: +45k), which could be explained by the festivities during the quarter. This translated into slower monthly run rate of 10k (2Q13: +15k)- not entirely surprising as take-up rate rose. The take-up for TM’s UniFi broadband service remained strong, rising to 42% (1Q13: 40%), based on 1.44m premises passed.

In contrast, Maxis managed to see an improvement in its fibre subscriber base, with 7k new customers in 3Q (2Q: +5k). TM has historically been grabbing the lion’s share (c.90%) of industry fibre net adds but saw this figure eroded to 81% in 3Q. We think it is still too early to conclude that Maxis is beginning to chip away TM’s dominance in the fibre market. TM has responded with a limited time promotion of its UniFi broadband service, which involves upgrading both new and existing customers to higher broadband speeds if customers opt to sign up for one of their premium IPTV content.

TM’s recent move to acquire selected Barclays Premier League (BPL) live matches from ASTRO (ASTRO MK, BUY, FV: MYR3.36) in August is mildly positive as we believe this will help keep UniFi churn in check. It also offers TM the opportunity to lift its ARPU, which is gaining traction as UniFi ARPU widened MYR3 q-o-q to MYR183 in 3Q13. However, this may not directly translate into earnings in the short term due to the associated content costs, which we believe will not come cheap.

Valuation & Recommendation

We maintain our UNDERWEIGHT stance on the sector, as we believe the telcos are still facing headwinds in monetising data effectively alongside the cannibalisation of  SMS revenues. We expect industry revenue growth to moderate slightly from 5.6% in 2013 to 4.6% in 2014. With no further expectations of tax incentives after they expired in 3Q13, we believe the prospect of positive earnings surprises in 2014 will be minimal. Nonetheless, the telcos will be mindful of operational challenges and are expected to resume their cost management initiatives to keep their margins stable.

We keep our SELL calls on DiGi (FV: MYR4.10) and Maxis (FV: MYR5.90), while there is no change to our NETURAL ratings on TM (FV: MYR5.50), TdC (FV: MYR3.95) and Axiata (FV: MYR6.55). We still like Axiata for a potential turnaround in XL (EXCL IJ, NEUTRAL, FV: IDR4600), which should lead to a rebound in its FY14 earnings growth.       

Singapore Telecoms (NEUTRAL)

The core earnings of Singapore telcos were mostly in line with the exception of StarHub (STH SP, NEUTRAL, FV: SGD4.55), which beat expectations due to the NGN adoption grant and higher-than-expected margin. The structural decline in roaming revenue continued to pressure mobile revenue, notwithstanding the improved data monetisation efforts by the telcos. SingTel (ST SP, NEUTRAL, FV: SGD3.70)’s results were dampened by the strength of the SGD although we are encouraged by the group-wide cost management efforts, with Optus posting a strong 15% y-o-y EBITDA growth in 3QFY13 and 10% for 1HFY14. Post the results, we upgraded our forecast for StarHub but maintained our projections for StarHub and M1. Our Top Pick for the sector remains M1 (M1 SP, NEUTRAL, FV: SGD3.25).

Roaming revenue pressure lingers on; M1 mobile growth outflanks peers

The industry posted a relatively muted 0.3% q-o-q mobile revenue growth in 3Q13 (2Q13: +3.6% q-o-q) due to the roaming revenue weakness. While the telcos foresee some stabilisation in roaming revenue going forward (10-20% of mobile revenue) due to various incentives and promotions put in place, the weaker roaming usage is expected to persist due to changes in customer behaviour. Handset sales were down sequentially as customers awaited the launch of the new iPhone and Samsung models, which made their debut in late September. YTD, mobile revenue growth of 4.1% y-o-y was consistent with the guidance by the telcos (see Fig.10), with growth supported by the increased take-up of tiered plans. M1 continued to see the strongest revenue growth, at 6.5% for 9M13 vs SingTel’s 6% and StarHub’s 1%.

Subscriber acquisition cost (SAC) to see seasonal jump in 4Q13

The telcos’ SAC moderated q-o-q due to a combination of: (i) lower subsidies accorded on handsets, (ii) a higher proportion of lower-end Android smartphones bundled, and (iii) overall lower volume of handsets sold. That said, SAC is expected to rise q-o-q due to seasonality and the launch of the new iPhone 5s/5c. While the change in the sales mix of handsets (from higher-end models to mid-priced models and vice versa) will impact SAC from one to quarter to another, it is also a function of demand and the relative appeal of certain models. We think handset subsidies are unlikely to decline significantly as the telcos continue to seed smartphone adoption and take-up of tiered data plans. StarHub said it continued to see a high level of re-contracts from among its postpaid customers.

SingTel’s Singapore EBITDA margin fell 3ppts q-o-q due to some non-recurring income booked in 2Q13 for its enterprise division. We suspect that Singapore consumer EBITDA was also diluted by the cost related to the Barclays Premier League (BPL), which was recognised during the quarter and will likely offset opex gains. Both StarHub and M1 posted relatively steady EBITDA margin sequentially on lower SAC.

Rising take-up of tiered data plans; but ARPU uplift continues to be nominal     

Some 36% of mobile postpaid subscribers have re-contracted to tiered 4G data plans in 3Q13 vs 30% in 2Q13 and 16% in end-2012. The number of tiered data subscribers who exceeded their monthly data caps expanded from 12% in 2Q13 to 14% in 3Q13. Despite the stronger take-up, the ARPU uplift for the telcos was nominal, which could suggest that subscribers were cautious on usage and possibly keeping within their existing data bundles. SingTel and M1’s postpaid ARPU contracted 1.3% and 0.3% y-o-y in 3Q13 and were relatively flat q-o-q. StarHub attributed the 3% q-o-q decline in its postpaid ARPU to the seasonally higher roaming revenue in 2Q13. Stripping out roaming contribution, postpaid ARPU was flat sequentially.

SingTel gains further revenue share for mobile, broadband & pay-TV

SingTel’s aggressive bundling efforts contributed to further revenue and subscriber share gains for mobile, broadband and pay-TV segments in 3Q13. The telco added 8k pay-TV subs, the highest since 3Q12. This was despite the IDA’s ruling for the cross-carriage of the BPL content which came into effect on 17 Aug. StarHub managed to reverse six quarters of contraction in its pay-TV base after it dangled a generous SGD600 rebate for subscribers switching over to its BPL bundled plans. StarHub’s gesture to lower the cost for viewing the BPL has undoubtedly earned itself some goodwill among subscribers who had previously churned. This should allow the telco to recapture some market share lost to SingTel.  

SingTel said of the 8k customers on cross carriage, about half are not on mio-TV, which allows it to cross-sell its services. We expect SingTel to aggressively acquire fresh content going forward to mitigate the downside risk from the BPL cross- carriage ruling, which will also apply to M1 upon its pay-TV base hitting 10,000 subscribers

Guidance

SingTel and M1 have maintained their guidance for the full year. StarHub moderated its overall revenue guidance (FY13 revenue likely to come in lower than FY12) while upping its previously conservative EBITDA margin guidance by 1ppt to 32%. The telco, however, expects service revenue to be stable which would imply continued mobile revenue share losses in 4Q13. All three telcos have reaffirmed their dividend guidance of 60-75% (SingTel), 20 cent/share (StarHub) and 80% of earnings (M1). We see scope for StarHub and M1 to surprise on dividends given their relatively under-leveraged balance sheets, with net debt/EBITDA at 0.5x and easing capex.

Valuation & Recommendation

Maintain NEUTRAL. We prefer M1

The Singapore telco sector remains a NEUTRAL as sector P/E and EV/EBITDA valuations are at +1-2 SD above historical five-year mean. That said, share prices should be well-supported by potential capital management upsides given the telcos’ strong balance sheets. Post-3Q13 results, we upgraded our core earnings forecast for StarHub but retained our projections for SingTel and M1.

We maintain our NEUTRAL recommendation on SingTel (FV: SGD3.70) as the stock lacks re-rating catalysts. SingTel continues to execute well on its domestic business, but structural and competitive headwinds in Australia remain an overhang alongside the strength of the SGD. The investments in embryonic digital assets will continue to pressure group EBITDA given the start-up nature of the various businesses.     

We keep our NEUTRAL rating on StarHub (FV: SGD4.55) due to competitive pressures in mobile, broadband and pay-TV. The stock’s key re-rating catalyst is capital management which we believe will materialise in FY14. 

Although our preferred sector pick, we keep our NEUTRAL call on M1 (FV: SGD3.25) on concerns over margin pressure from handset subsidies. The key re-rating catalysts for the stock include: (i) stronger-than-expected results, and (ii) capital management.

Indonesian Telecoms (NEUTRAL)

The September quarter turned out to be fairly lacklustre for the Indonesian telcos due to more subduedLebaran activities. We keep Telkom (TLKM IJ, BUY, FV: IDR2500) as our Top Pick as it continued to add mobile revenue and subscriber market share during the quarter, with stock sentiment looks set to be further boosted by the spin-off of its tower assets in 1H14. Indosat (ISAT IJ, NEUTRAL, FV: IDR4600) remains in a state of flux, as its disruptive network modernisation exercise has affected commercial execution in the absence of a permanent chief commercial officer. While we see the merger with Axis as positive for XL (EXCL IJ, NEUTRAL, FV: IDR4,100) given access to valuable spectrum resource and capex/opex savings, we remained concern over Axis’ losses, which will dilute XL’s earnings in the next two FYs. We expect XL to guide on the potential earnings impact from the merger exercise when the transaction is completed in 1Q14.

Telkomsel excels

Telkomsel continued to gain revenue and subscriber market share. Its revenue grew 8% y-o-y in 3Q13, while that of ISAT and XL contracted. We believe Telkomsel continued to see good revenue momentum outside of Java (60-70% share of the market) as more subscribers turn to feature-rich handsets and smartphones to experience mobile internet. Telkomsel’s revenue growth of 11% was ahead of the industry’s 8% growth, and on track to meet its earlier revenue guidance. While we see an improvement in XL’s revenue momentum following the price optimisation initiatives introduced earlier in the year alongside declining competitive intensity, management has nonetheless lowered topline guidance, which implies a y-o-y contraction in revenue for FY13. We think XL is likely to also refrain from any aggressive moves in 1H2014 due to the merger with Axis.

Lebaran almost a non-event    

The channel activities during the Lebaran were significantly more muted this time round compared to 2012. In fact, the mobile revenue growth in the industry was the weakest in over two years for a Lebaranquarter. We attributed this to the ongoing price repair in the market and the telcos’ focus on data with various pricing bundles unveiled. ISAT was the earliest of the GSM telcos to roll out its Lebaran offerings in May, but network issues prevented it from monetising the growth in data. XL’s promotions had the least impact during the quarter – not a surprise considering the telco was busy optimising its prepaid product to fend off competition from smaller operators.

ISAT’s network modernisation issues have impacted commercial execution

ISAT under-estimated the potential impact from the large scale network modernisation swap, which has to led to the telco ceding revenue share over the past two quarters. The issues appear more deeply rooted than management initially thought. In mitigating the impact, the telco delayed its network swap and adopted a more selective cluster-based approach for its upgrade. We gather from management that the bulk of the problems have been resolved although we suspect it would take another quarter or so for ISAT to regain its mobile revenue momentum. With the lack of a permanent chief commercial officer (CCO) since the departure of Erik Meijer, the telco is again saddled with commercial execution woes.

XL to surrender 10MHz of 2100MHz under the merger with Axis   

In approving XL’s merger with Axis, the Indonesian government has requested that XL returns two blocks (2x 10MHz) of the 2100MHz spectrum. The telco is allowed to retain the 2x15MHz 1800MHz spectrum from Axis. Although spectrum retention was a key condition spelt out by XL for the deal to proceed, management had envisioned a smaller spectrum in a base case scenario as it is not unreasonable to expect the government to claw back excess spectrum after assessing the implications to other stakeholders and the market. XL had hoped for only 5MHz of the 2100MHz to be returned in the ‘best-case’ scenario.

We believe there may be variations to the USD600m opex/capex savings guided by management earlier, as this was based on the assumption that XL retained all spectra from Axis. With the combined 22.5MHz at 1.8GHz, XL is able to progressively convert 900MHz subs to 1800MHz, potentially freeing 900MHz for 3G use in the longer term, which is less capex-intrusive.  

Industry consolidation still at an early stage  

The merger between XL and Axis has set a benchmark for potential M&As in the sector. We see this as driving the structural consolidation in the sector, where 10 licensed operators are clearly not viable in a saturating market. We do not rule out further M&As involving smaller operators given that most are loss-making and lack the financial resources to compete.

Tower companies are better proxies to data amid pricing challenges

The Indonesian tower companies (ITC) exhibited strong revenue and EBITDA growth q-o-q and y-o-y in 3Q13/9MFY13, supported by higher co-locations and the building of new towers. We continue to believe that ITCs offer a better proxy to the robust data growth in Indonesia in the medium term by virtue of their high operating leverage and lucrative margins.    

Guidance

There is no change to Telkom and ISAT’s revenue, EBITDA and capex guidance for FY13.

XL has moderated its revenue guidance to ‘low single digit’ from ‘mid-single digit’, seeing that 9MFY13 revenue growth was a paltry 1%.

Valuation & Recommendation

Maintain NEUTRAL on Indonesian telcos; Telkom our Top Pick

Despite the improvement in the mobile competitive landscape, we maintain our NEUTRAL stance on the Indonesian telecoms sector due to the cautious economic sentiment and uncertainties in the run-up to the presidential elections in mid-2014. We like the tower infrastructure companies given their stronger EBITDA growth and superior margins.

Telkom (TLKM IJ, BUY, FV: IDR2500) remains our top telco pick as we expect it to gain further revenue and subscriber shares outside of Java, where it is dominant. The other key re-rating catalysts are: (i) the spin-off of its tower assets by 1H14, and (ii) the monetisation of other non-core assets. There is scope for management to up its dividend payout with proceeds from the disposal of non-core assets.

XL stays a NEUTRAL (EXCL IJ, FV: IDR4600) as we remained concern over the potential earnings dilution in the medium term from the acquisition of loss-making Axis. We had earlier removed the discount to the target PER used to value the stock after the government approved the merger deal.

Investors should avoid ISAT (ISAT IJ, NEUTRAL, FV: IDR4600) given renewed risks to its commercial execution, which we think will continue to be a drag on earnings. The group’s higher gearing and larger percentage of USD debt render it more susceptible to the IDR weakness.

We also like independent tower company TBIG (TBIG IJ, BUY, FV: IDR7250), given its higher revenue exposure to the major telcos and a greater proportion of its tower portfolio in densely-populated areas that would fuel earnings growth going forward.

Thailand Telecoms (OVERWEIGHT)

During the 3Q13, mobile competition in the Thai market intensified as telcos aggressively lured  3G subscribers via attractive handset bundles. The higher A&P cost boosted opex although the impact was partially neutralised by regulatory cost savings under the 3G licensing framework. We expect the telcos to show more significant uplift in EBITDA margins in FY14/15 after achieving a critical mass of 3G subscribers and data usage.

The recent selldown in the sector, sparked by concerns over the political unrest in the country, provides good entry points for investors with a longer-term investment horizon, in our view. Our OVERWEIGHT stance on the sector is predicated on the combination of superior FY13-FY15 earnings CAGR exceeding 15% for the telcos and their sustainable dividend yields of ~6%. We keep our BUY ratings on ADVANC and DTAC based on FVs of THB309 and THB130 respectively. ADVANC remains one of our top regional picks.  

Weak consumer sentiment a drag on mobile revenue

The feeble consumer sentiment during the quarter led to a contraction in mobile revenue sequentially as voice revenue tumbled 2-7% (-3-4% y-o-y). Alongside the lower interconnect charge, increased 3G-related A&P and depreciation expenses, ADVANC’s 3Q13 earnings fell 5% y-o-y while DTAC came in flat. Meanwhile, we observed stronger EBITDA margin for the telcos q-o-q and y-o-y, on the back of lower regulatory fee under the new 2.1GHz licensing regime. The upside to EBITDA would have been stronger had it not for the spike in marketing and network opex.

Competition is heating up

Competition in the cellular market intensified in 3Q13 with strong above-the-line marketing campaigns on 3G. In addition to innovative 3G bundled plans, Thai consumers now have the choice of more affordable white label smartphones. The telcos have also resorted to an indirect subsidy model on premium smartphones, in a bid to boost 3G ARPU and better monetise data. Although rising competition is a concern, we do not expect the telcos to pursue irrational moves on pricing. The savings in regulatory cost should be more than sufficient to offset mid-term cost pressures, in our view, as illustrated by telcos’ improving EBITDA margins.

Strong 3G take-up drives exponential data growth

The telcos continued to aggressively sign-up 3G subscribers via attractive smartphone bundles, which include the offer of free handsets. ADVANC near tripled its 3G subs base q-o-q to 10.5m in 3Q13 (27% of existing base), which surpassed its earlier target of 10-12m subs by end-2013 in November. DTAC, which officially unveiled its 3G service in July, added 3.7m subs (13.4% of existing base) for the quarter. The strong take-up of 3G and increased smartphone adoption fuelled the 35% and 89% y-o-y growth in 3Q13 data revenue for ADVANC and DTAC respectively. ADVANC highlighted that it witnessed ARPU uplift of 24-36% for 3G prepaid and postpaid respectively, while DTAC reported a 30% uplift over 2G.

We expect 3G subs growth to remain robust as the telcos race to migrate legacy subscribers to capitalise on the voracious appetite for data. ADVANC has already achieved 2013 target of 70% population coverage for the 3G-2.1GHz service, and is now targeting 90%/97% by FY14/FY15. Meanwhile, DTAC is looking to achieve 50% 3G population coverage by year-end. This is in line with the requirement by the regulator for all 3G spectrum holders to provide coverage to at least 50%/80% of the population by FY14/FY16.

Management guidance and forecasts

ADVANC toned down its guidance on FY13 service revenue growth to 5-6% (from 6-8%) on the back of cautious consumer spending (against the backdrop of a slowing economy), which would lead to weaker voice usage. Note that its voice revenue is also pressured by higher revenue share in the upcountry region. Management has, however, reaffirmed its: i) FY13 EBITDA margin guidance of 43%, ii) FY13 3G-2.1GHz subs target of 10-12m (40% on 3G devices), and iii) capex of THB70bn within three years. The company may also incur a one-time impairment loss on its subsidiary, Digital Phone Company Ltd (DPC) in 4Q13, similar to the THB2.5bn non-cash loss recorded in 4Q last year (DPC’s recoverable amount stood at THB4.5bn as of 3Q13). Although this merely affects ADVANC’s separate financial statements, it may negatively impact its overall dividend payout of 100%.

DTAC moderated its FY13 revenue guidance from ‘high single digit’ growth to ‘+5-7%’, but maintained its EBITDA margin guidance of 30-31% and capex at THB14.5bn. It reiterated its 10m 3G-2.1GHz subs target for FY13 and expects meaningful regulatory cost savings from 1Q14 onwards.

We lowered ADVANC and DTAC’s FY13-FY15 core earnings forecasts by 3-4%. Our numbers are on average 3-5% below consensus.

Although the telcos maintained their FY13-FY15 capex guidance in 3Q13, we do not rule out higher capex for FY14 and FY15. For the case of ADVANC, we observe aggressive network rollout in the past nine months and there is a possibility that the incumbent telco may accelerate its capex plan to further extend its 3G-2.1GHz reach. Also, we think they are compelled to do so given that its 2G-900MHz concession with TOT Corp is coming to an end in FY15. On the other hand, DTAC may play catch-up to ADVANC. Our sensitivity analysis shows that for every 10% rise in FY14-FY15 capex, the impact on our current earnings forecasts for both companies is < 1%.  

Valuation & Recommendation

We see the recent 16-26% de-rating on the Thai telco stocks on concerns over the political unrest (not new) as another good entry point for investors with a longer-term investment horizon. The structural growth theme for the sector remains intact. The Thai telcos are relatively inexpensive compared to regional peers, supported by their superior earnings growth. 

Although we have buy recommendations on ADVANC and DTAC, we prefer the former due to its: (i) stronger balance sheet (3Q13 net debt/equity: 0.2x), (ii) proven track record of sound operational execution, and (iii) market leadership position.

Source: RHB