Wednesday 26 November 2014

Singapore Telcos

OCBC on 25 Nov 2014

For 2015, we believe that the telcos would continue to remain fairly defensive, despite challenges in both the Pay TV and broadband segments; mobile segment should still see modest ARPU growth, driven by increased data usage. While yields have fallen back to around 3.8% on average, we believe they are still fairly attractive in the current low interest-rate environment. Hence we maintain our NEUTRAL stance on the industry - SingTel [BUY, S$4.18 fair value] remains our top pick.

Still banking on data growth
With the Singapore market already close to saturation point, we believe that mobile revenue growth can only be driven by the ability of the telcos to effectively monetize the switch towards higher data usage; but this could remain a challenge as smartphone users are becoming more discerning when it comes to using data. Nevertheless, we should still see some ARPU uplifts as the telcos continue to migrate their existing subscribers to the tiered pricing plans with restrictive data bundles. However, we cannot rule out the possibility of a 4th telco emerging sometime in 2016.

Broadband price competition may start to ease 
No doubt that the competition in the broadband sector is likely to remain intense, especially in the residential segment; but we are seeing signs that there is a visible shift away from using price to grab market share. As such, ARPUs should start to stabilize and even improve slightly from here as rivals start to offer higher speeds at the same price points to compete. 

Pay TV market facing OTT challenge
With no major sporting content up for renewal, we do not expect to see any major changes in market share or ARPUs for both SingTel and StarHub. However, we do note that the market appears to be fairly saturated and believe that there is limited growth ahead. On the other hand, we think the OTT operators remain the largest threat to the incumbents, which could further restrict growth.

Yields are fairly resilient 
While there are threats to the telco sector, we believe that the medium-term outlook remains fairly stable and their abilities to generate ample free cash-flows should keep yields fairly resilient around an average of 3.8%. Maintain NEUTRAL on the sector – SingTel [BUY, S$4.18 fair value] remains our top pick.

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