Singapore Telcos

Kim Eng on 9 Jan 2012

The writing is on the wall. SingTel’s new Prestige 75 mobile data plan currently allows users to download 10GB of LTE data and 50GB of 3G data. But once LTE coverage reaches peak levels next year, new users will only get 10GB of LTE quota. We believe this will also be the new reality for 3G data plans, as all the telcos intend to review their existing 3G packages to cut the generous data caps, remove the unlimited option altogether and introduce more usage-based plans in future.

Driven by necessity. With the popularity of smartphones has come more and more ways to communicate. For the most part, they are free. This has eroded the need to pay for expensive voice calls or SMS. As a result, while voice revenues have been relatively stable so far, they may come under greater pressure in future, following Malaysia where voice revenues have been on the decline for more than a year.

Data growth strong but no way to monetise. While strong data growth will offset the loss of voice revenue, telcos have not been able to monetise this growth mainly because of the generous data caps. Margins have trended down over the past few years as data margins are generally lower than voice or SMS margins. Having said that, it seems margins have started to stabilise lately as competition eases.

What’s next for telcos? In the past, telcos could not properly price data as long as unlimited plans existed. We believe they can adapt some of the techniques they now use to optimise yield from voice and SMS, such as customer segmentation, tiered access and overage charges. Singapore telcos can also take a cue from Malaysia, where data caps are much lower and plans are more revenue-focused.

Margin pressure from data can be offset by volume growth. We are optimistic that telcos can better monetise their data investments in future, although our sensitivity analysis suggests that a 5ppt substitution in voice revenue will result in a 1ppt drop in EBITDA margin. However, the actual impact will vary depending on revenue composition and data traffic growth. In general, we believe M1 has the best scope to benefit given its lower earnings base, followed by StarHub and SingTel.

Our top picks are StarHub and M1. StarHub is the best-placed among the three Singapore telcos to sustain earnings in a year of economic slowdown due to its stable domestic businesses. SingTel’s aggression in Pay TV, its biggest headache, also appears to be becoming more rational. M1 was held back by the slow NGNBN pace last year, but this should dissipate this year and sign-ups by consumers should accelerate. There is also scope for capital management by both telcos.

Our top picks are in the following order:

StarHub (Buy, TP $3.27, FY12F dividend yield 6.9%) – We believe StarHub is the best-placed among the three Singapore telcos to sustain earnings in a year of economic slowdown due to its large and stable  domestic businesses. SingTel’s aggression in Pay TV, its biggest headache, also appears to be becoming more rational. In addition, we see scope for additional capital management in 2H12 if the economic headwinds start to die down.

M1 (Buy, TP $2.95, FY12F dividend yield 6.4%) – The stock did not perform as well as StarHub last year as the Next Generation Nationwide Broadband Network (NGNBN) did not manage to get much traction. However, we reckon structural issues that had prevented faster expansion of coverage last year, such as difficulties encountered by contractors in gaining building access to install the wiring, should be solved this year, and sign-ups by consumers should rise as the telcos make their pricing plans more attractive and the benefits of having a fibre connection at home becomes more apparent. There is also scope for capital management measures.

SingTel (Buy, TP $3.51, FY Mar13F dividend yield 5.6%) – Earnings diversification is SingTel’s top selling point, as its dividend yield is not as high as either StarHub or M1. While risks exist in the form of the constantly depreciating Indian rupee, greater competition in Australia and potential Telkomsel corporate restructuring, they have to be balanced against receding competition in India and Singapore, as well as a turnaround in Africa.