We upgrade the sector to NEUTRAL (from Underweight) after upgrading DiGi  and  TdC  to  BUYs.  We  find  that  DiGi  has  been  monetising  data most  effectively,  with  the  added  bonus  of  keeping  its  traditional  voice revenue stable. We expect TdC’s share price to ride on DiGi’s coat-tails (DiGi shares comprise 31% of TdC’s SOP FV), but TM, Axiata and Maxis’ FY14 earnings growth prospects look unexciting for now.

Solid  4QCY13.  Four  out  of  the  five  companies  under  our  coverage  – Axiata, Maxis, DiGi and TIME dotCom (TdC) – reported results that were within  our  expectations.  Telekom  Malaysia  (TM),  however,  sprang  a positive surprise due to higher-than-expected tax incentives.  

Earnings  revision  trend.  Consensus  revised  DiGi’s  FY14  earnings higher  by  3.0%,  as  management  guided  that  its  old  network  was  fully-decommissioned  in  3Q13,  which  implies  lower  depreciation  charges  in 2014.  Consensus  also  lifted  TM’s  FY14  earnings  by  4.9%,  which  we think  reflects  the  group’s  stronger-than-expected  FY13  results.  Axiata and  Maxis  both  saw  slight  downgrades  in  earnings  forecasts  on expectations of weaker EBITDA margins. Maxis only guided for absolute core EBITDA to be similar to that in FY13.

Sequential  revenue  growth  still  tepid.  The  sector’s  overall  4Q sequential revenue growth was helped by a seasonally strong quarter for TM (+14.1%), mainly due to lumpy customer projects. The cellcos had a relatively  muted  quarter,  as  short  message  service  (SMS)  revenue continued  to  be  eroded  by  rising  over-the-top  (OTT)  usage,  although DiGi fared better than its peers.

EBITDA margins under some pressure. The cellcos’ EBITDA margins were  generally  weaker  as  Maxis  incurred  higher  marketing  expenses while  Celcom  experienced  higher  handset  subsidies.  TM’s  EBITDA margin  contracted  slightly  owing  to  content  and  high-speed  broadband (HSBB)  maintenance  costs.  As  expected,  TdC’s  EBITDA  margin improved q-o-q following several one-off costs in 3Q and the recognition of the remaining higher margin non-recurring node fiberisation contracts worth MYR4.2m in 4Q.

Upgrade sector to NEUTRAL. Following our recommendation upgrades on both DiGi and TdC to BUY, we upgrade the sector to NEUTRAL from Underweight.  Maxis  is  our  only  SELL  call  currently.  We  note  that  OTT applications  continue  to  have  a  negative  material  impact  on  SMS revenue,  which  makes  it  difficult  for  the  telcos  to  sustain  high  data growth  going  forward  (SMS  is  a  component  of  data,  along  with  mobile internet and value-added services). In this respect, we find that based on FY13  results,  DiGi  monetised  data  most  effectively,  with  the  added bonus  of  keeping  its  traditional  voice  revenue  stable  (vs  marginal declines among its peers).

Snapshots Of 4QCY13 Results

The Malaysian telcos reported 4QFY13 results that were generally in line, with TM surprising on the upside due to higher-than-expected tax incentives. Post-results,  we  maintain  our  earnings  forecasts  for  Axiata,  Maxis,  TM,  TdC,  and upgrade DiGi’s earnings estimate.

Axiata  -  Axiata’s  results  were  in  line  with  both  our  and  consensus expectations.  We  maintain  our  FY14  earnings  forecast  and  introduce our  FY15  numbers.  Our  SOP-based  FV  is  tweaked  higher  to  MYR6.60 (from MYR6.50) after updating the stock’s valuation parameters.  

TM  -  TM’s results surprised positively due to higher-than-expected  tax incentives.  However,  we  maintain  our  FY14  earnings  estimate  and introduce  our  FY15  numbers,  since  these  tax  incentives  expired  last year. Our FV is maintained at MYR5.50, based on DCF (WACC: 8.1%, TG: 1.5%).  

Maxis  -  Maxis’  results  were  in  line  with  both  our  and  consensus expectations.  We  maintain  our  FY14  earnings  forecast  and  introduce our  FY15  numbers.  We  keep  our  FV  at  MYR5.90,  based  on  DCF (WACC: 8.6%, TG: 1.5%).

DiGi  -  DiGi’s  results  were  in  line  with our expectations  but  ahead  of consensus  estimate.  Following  management’s  guidance  for  lower depreciation,  we  raise  our  FY14  earnings  forecast  by  10.3%  and introduce our FY15 numbers. After rolling over to FY15 and lowering our WACC  assumption,  we  upgrade  DiGi  to  BUY,  with  a  revised  FV  of MYR5.60.  

Time  dotCom  -  TdC’s results were broadly in line with both our and consensus  expectations. We maintain  our  FY14  earnings  estimate  and introduce our FY15 numbers. Following our recent upgrade on DiGi, we revise  TdC’s SOP-derived  FV  higher  to  MYR4.30  (from  MYR3.95)  and upgrade the stock to BUY (from Neutral).

Earnings revision trend

Consensus revised DiGi’s FY14 earnings  3.0%  higher  after  its  management  guided that  its  old  network  was  fully  decommissioned  in  3Q13,  which  implies  depreciation charges will come down in 2014. Consensus also revised TM’s FY14 earnings higher by 4.9%, which we think reflects its stronger-than-expected FY13 results. Axiata and Maxis  both  saw  slight  downgrades  in  earnings  on  expectations  of  weaker  EBITDA margins. Maxis only guided that absolute core EBITDA will be similar to FY13’s level.

Revenue growth & EBITDA margins

The  sector’s  4Q  overall  sequential  revenue  growth  was  helped  by  a  seasonally strong  quarter  from  TM  (+14.1%),  mainly  due  to  lumpy  customer  projects.  The cellcos  had  a  relatively  muted  quarter,  as  SMS  revenue  continued  to  be  eroded  by rising OTT usage, although DiGi fared better than its peers.

The  cellcos’  EBITDA  margins  were  generally  weaker  as  Maxis  incurred  higher marketing  expenses  while  Celcom  experienced  higher  handset  subsidies.  TM’s EBITDA  margin  saw  a  slight  contraction  due  to  content  and  high-speed  broadband (HSBB)  maintenance  costs.  As  expected,  TdC’s  EBITDA  margin  improved  q-o-q following  several  one-off  costs  in  3Q  and  the  recognition  of  the  remaining  higher-margin non-recurring node fiberisation contracts worth MYR4.2m in 4Q.

Voice & non-voice 
DiGi’s strong growth in mobile internet (+8.7% q-o-q) continues to drive its non-voice revenue  contribution  higher.  Celcom  and  Maxis  both  saw  steady  growth  in  mobile internet (3-5% q-o-q), but their eroding SMS revenue meant that non-voice revenue contribution as a percentage of revenue was flat q-o-q. Device sales in 4Q were also relatively modest.

On a positive note, the cellcos’ voice revenue held up relatively well, except for Maxis (-2.1% q-o-q). Average revenue per user (ARPU) was generally stable on the back of relatively stable minutes of usage (MOU).

While  it  has  been  challenging  for  DiGi  in  particular  to  stimulate  usage  among  its postpaid subscribers thus far, we think the group is in a better position now following the completion of its network modernisation in 3Q13. DiGi has generally held back on driving postpaid subscriber growth for the last several quarters, but this looks likely to change given its better capacity and coverage.

Operating Statistics

Risks and earnings forecasts 
The  risks  to  our  view  include:  i)  weaker-than-expected  subscriber  additions,  ii) poorer-than-expected execution (such as network upgrades and expansion), and iii) an intense pricing environment.  We make no changes to our earnings forecasts for now.

Valuation and recommendation

Following our recommendation upgrades on both DiGi and TdC to BUY, we upgrade the sector to NEUTRAL from Underweight. We note that OTT applications continued to  make  a  negative  material  impact  on  SMS  revenue,  which  made  it  difficult  for  the telcos to sustain high data growth going forward (SMS is a component of data, along with mobile internet and value-added services).  
In  this  respect,  we  find  that  based  on  FY13  results,  DiGi  monetised  data  most effectively,  with  the  added  bonus  of  keeping  its  traditional  voice  revenue  stable  (vs marginal declines for its peers). We expect TdC’s share price to ride on DiGi’s coat-tails, as DiGi shares comprise 31% of TdC’s SOP-derived FV.  We remain NEUTRAL on Axiata, with a SOP-based FV of MYR6.60, and expect the group’s FY14 earnings growth outlook to remain cloudy due to: i) XL’s slow recovery, and  ii)  dilution  in  the  latter’s earnings following  its  acquisition  of  Axis.  TM  is  also  a NEUTRAL,  with a DCF-based FV of MYR5.50. Despite healthy revenue growth, the group’s FY14 earnings growth lacks prospects as its tax incentives have expired. We  keep  our  SELL  call  on  Maxis,  with  a  DCF-derived  FV  of  MYR5.90,  as  we  think the stock lacks catalysts due to its lacklustre earnings growth and potential pressure 
on margins.

Source: RHB