Singapore Telecommunication

Kim Eng on 5 Feb 2013

StarHub and SingTel's upcoming quarterly results will be out on 7 and 14 Feb 2013 respectively. We expect StarHub to report SGD80-84m for 4Q12 and SGD880-900m for SingTel for 3QFY13. The trajectory is similar, namely both down YoY, but the calls could not be more different. We continue to like StarHub for its improving cashflow and low net debt/EBITDA, which gives it room to raise dividend payout, either as recurring ordinary dividends or as a special payout later in the year. It is also competing well against an increasingly aggressive SingTel, unlike M1. BUY, TP SGD4.31. SingTel's increasingly cost-heavy strategy however is expected to weigh down on profits. It is beefing up Pay TV content to shore up its bundling offers and spending big money on acquisitions of start-ups that have no chance of positive returns in the short-term. Speculation on a Myanmar licence is likely a "buy on rumor, sell on news" event. SELL. TP SGD3.03.

StarHub 4QFY12: Margins may surprise on upside. StarHub will report full year results on 7 Feb, we expect net profit of SGD80-84m (down 9-13%/13-17% YoY/QoQ). Seasonal costs should rise but despite iPhone 5 and Galaxy S3, handset costs are likely to remain lower than a year ago, when it spiked on the  iPhone 4S. As a result, margins may surprise on the upside. Topline may be light as pay TV is expected to experience higher churns and roaming revenue also lower.

However, margins could surprise on the upside given iPhone’s growing loss of lustre, better pricing for handsets on the back of higher sales volumes and the strong Singapore dollar. We maintain BUY on StarHub for potential dividend surprise, either at the beginning of the year when it announces its new full year dividend guidance or later in the year when it may beef up capital management.

SingTel 3QFY13: Still a cost-heavy bottomline. SingTel is also likely to report a YoY decline in net profit for 3QFY13 on Feb 14. We are expecting net profit to fall in the SGD880-900m range, dragged down by higher costs as it aggressively expands market share and carries forward its transformation strategy. Its current transition is in the name of building new growth drivers that, while positive in the long run, will rack up costs in the short run. In particular, big-ticket strategic acquisitions can be expected to drag down the bottomline, while aggressive acquisition of new customers in mobile, broadband and Pay TV will drive up operating costs, particularly in Pay TV content. The stock’s recent rise was probably on speculation of a Myanmar licence win, for which it is bidding for along with Axiata, ST Telemedia (substantial shareholder of StarHub), Digicel and most recently, Bharti Airtel has been reported to be throwing in its bid envelope. We believe this move is of the “buy on rumour, sell on news” variety, as the country’s primitive infrastructure will require significant initial investment that would depress cashflow further. Maintain contrarian SELL with street low target of SGD3.03.