Singapore Telcos

OCBC on 31 Aug 2012

All three telcos recently reported 2QCY12 results, but StarHub was the only bright spark. Going forward, SingTel and StarHub have mostly kept their previous guidance of stable outlook, along with possible margin pressures in 2HCY12; but M1 has not reiterated its “stable” top and bottom-line statement. Nevertheless, thanks to their strong cashflow-generative businesses, the telcos have kept their dividend payout guidance. With the exception of StarHub (+23%), the other two stocks have underperformed (M1 +3%, SingTel +7%) versus the STI’s 14% gain YTD. But with markets likely to remain volatile, we believe that the telcos’ defensive earnings and still-attractive yields offer a safe harbour for risk-adverse investors. Maintain OVERWEIGHT.

Only StarHub was above
All three telcos recently reported 2QCY12 results, but the only bright spark came from StarHub (even beat our earnings forecast) while both M1 and SingTel turned in quarterly results that were somewhat disappointing. For M1, it attributed the softer showing to accounting treatment for a popular Android phone (where subsidies are expensed upfront), while SingTel cited weaker forex rates (affecting Optus and regional associates) as reason behind for its muted showing.

Review of Singapore mobile operations
For the post-paid mobile market, there was no change to status quo – SingTel continues to dominate with a ~48% share, followed by StarHub with ~28% and M1 ~26%. Overall, the post-paid subscriber base here grew by 58k to 4125k, led by SingTel (+45k). We note that some 70% of new signups now take up smartphones, and data as a percentage of ARPU – currently around 37-42% - could increase further.

Mostly stable 2012 outlook
SingTel and StarHub have guided for a stable outlook ahead, although their EBITDA margin outlook continues to be fairly muted; this probably due to rising content cost for their Pay TV businesses. On the other hand, M1 has not reiterated its “stable performance at both top and bottom-line guidance”, given the continued strong interest in Android phones (also possibly expecting higher subsidies for another new iPhone, which should also affect both SingTel and StarHub). Nation-wide LTE roll-out is also on the cards for all three but it remains at best a 2013 story (largely dependent on availability of LTE handsets).

Maintain OVERWEIGHT
Again, StarHub has continued to do well (+23% YTD), while SingTel (+7%) and M1 (+3%) have continued to lag the STI’s 14% gain. But with markets likely to remain volatile, we believe that the telcos’ defensive earnings and still-attractive yields offer a safe harbour for risk-adverse investors. Maintain OVERWEIGHT on the sector, with M1 still our preferred pick.