Singapore Telcos

Maybank Kim Eng Research, May 28

WE upgrade SingTel to "buy" with a SOTP (sum of the parts)-based target price of S$4.35. With this upgrade, we now have "buy" calls on all the three telcos, prompting us to upgrade our sector weighting to an "overweight".

In terms of preference, M1 remains our top choice, followed by SingTel which displaces StarHub to the third position. Despite challenges on the pay TV and home broadband front, StarHub remains a "buy".

We believe SingTel's YTD underperformance and current low market expectations provide room for the stock to be re-rated ahead of StarHub.

Alignment of positive trends: In our view, the building blocks are fast falling in place and were evident in Q1 2014 results. Data monetisation accelerated in Q1 2014, driving mobile revenue to record levels with growth rate at its fastest in more than four quarters.

Tiered data plan users have also hit new highs of more than 50 per cent, and we expect 70 per cent by year-end. Fast-falling handset subsidies are another positive trend that would benefit margins.

Lastly, data roaming has finally stabilised after six quarters of year-on-year decline. The upshot: stronger earnings prospects for the industry.

Catalysts:

1) Data monetisation could take place faster than expected with emphasis on video content to drive data usage. Both SingTel and StarHub are developing more local content for their apps.

2) Data roaming could make a comeback on plans to make it easier to activate or even kick in automatically when users are overseas.

3) Low levels of gearing, especially for M1 and StarHub, and the absence of large capital expenditure requirements in the medium term suggest room for higher dividends ahead.

Risks: As the telcos expand the capabilities of their networks to handle newer services such as voice over LTE and the greater demand for video content, there could be network outages.

Regulatory fines aside, the key risk lies in higher user churn owing to unstable networks. One risk particular to SingTel is an acquisition of Shin Corp as was rumoured a few months ago, which we would view cautiously if it materialises.

Sector - OVERWEIGHT