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.
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