Regional telcos update – Muffled by regulations and competition (CIMB)

We remain UNDERWEIGHT on the regional telco sector given 1) regulatory uncertainties in Thailand and to a lesser extent Malaysia, and 2) stiff competition in Singapore. We are most optimistic on Malaysia which offers growth (via Axiata) and high dividends but will temper our view towards the end of the year when spectrum auction looms. Reflecting the maturity of this sector, dividend yields are soaring. We prefer telcos that offer growth or capital management initiatives. Our top picks are Axiata and XL Axiata which offer growth, and Telekom Malaysia which should make a generous payout. Axiata and XL could also surprise on the upside in terms of margins. Key sells are SingTel as it faces multiple headwinds, True due to its heavy gearing and StarHub which faces rising competition in fixed broadband and pay TV.