Telecoms Sector

OCBC Investment Research, March 25

BOTH M1 and SingTel reported Q4 CY2013 results that came in within our expectations, while StarHub's results tracked below forecast. M1's core FY2013 earnings were 3.5 per cent above our full-year forecast and SingTel's 9M FY2014 earnings met 73 per cent of our FY2014 estimate.

But due to lower-than-expected Ebitda margin, StarHub's core FY2013 earnings were 5 per cent below our forecast. Interestingly, M1 declared a special dividend, which brought its total payout to 121 per cent of earnings; StarHub kept its payout at $0.20 as guided.

Total post-paid mobile subscribers grew by a stronger-than-expected 2 per cent q-o-q to 4.53 million in the December quarter, led by StarHub, SingTel, then M1.

Meanwhile, the decline in monthly average revenue per use (ARPU) appears to be stabilising; and telcos are optimistic that ARPUs should improve as more subscribers switch over to the new tiered pricing plans with less generous data bundles.

M1 continues to expect moderate single-digit earnings growth, although capital expenditure (capex) will be slightly higher at $130 million. SingTel still sees mid-single digit decline in group revenue and low-single digit fall in Ebitda for FY2014 (ending March 31); but expects lower $2.2 billion capex spend versus $2.5 billion guided previously. StarHub is still guiding for low single-digit revenue growth with 32 per cent Ebitda margin.

Yields are still decent. As before, the spectre of rising interest rates is looming; but the recent pullback in the telcos' share prices is starting to bring dividend yields back towards the 5 per cent handle. Hence we think that these stocks should continue to have a place in any portfolio also for their defensive earnings. Maintain "neutral" on the sector.

Sector - NEUTRAL