Sector Overview

The  Telecommunications  Sector  under  our  coverage consists of SingTel, StarHub &  M1. StarHub (STH) and M1 are pure plays to the Singapore market, while SingTel (ST) has exposure to the Asia-Pacific region through its regional mobile associates.

• Stable earnings growth y-y for SingTel and M1
• Dividend yields remain attractive at 4.6% to 4.8%.
• M1 replaces SingTel as our most preferred stock in the sector.

Mobile

• More customers on 4G tiered plans and exceeding data allowances.
• Positive  mobile  customers  net  adds  across  three Telcos.

Pay TV

• Positive net adds for both SingTel and StarHub.  
• M1 upbeat on MiBox take-up rate.

Broadband

• Continued growth in fibre broadband take-up.
• Competition  remains  intense,  with  further  price discounts.

Most preferred stock: M1

M1 (Accumulate; TP: $3.55)  replaces  SingTel (Accumulate; TP: $4.06)  as  our  most  preferred  stock  in  the sector.  We  like  M1  over  SingTel  and  StarHub (Accumulate; TP: $4.52) as  M1  (i) stands to gain the most from improving mobile dynamics in Singapore,  and  (ii)  benefits  from  growth  in  its  Fibre broadband. Mobile accounts for a higher revenue proportion for  M1,  compared  to  its  peers.  With  its  fibre  broadband offering,  M1  continues  to  grow  its  fixed  services  revenue. Adverse FX movements continue to have a negative impact on  SingTel’s  earnings.  However,  SingTel’s  earnings remained stable  y-y in the last quarter  due to effective cost management strategy.

Positive on Telcos

We  remain  cautiously  positive  on  the  sector  as  the  Telco stocks  continue  to  provide  attractive  dividend  yields  and stable  earnings  growth.  We  see  data  monetising  gaining good  traction  in  Singapore  and  expect  it  to  continue  into FY2014.  More  subscribers  have  subscribed  to  4G  tiered plans and are increasingly exceeding  their data allowances. SingTel  and  M1  reported  improvement  in  EBITDA  margin on  service  revenue  while  EBITDA  margin  for  StarHub remained  stable  in  the  last  quarter.  Earnings  growth  was stable  across  the  three  Telcos  in  the  current  FY.  Despite expectations of the  Fed tapering in the near term, we think the Telcos continue to be attractive investments, providing earnings as well as dividend growth potentials

Outlook on Telcos

We remain  cautiously positive on the sector, as they  remain attractive  due  to  high  dividend  yields  and  stable  earnings growth.  M1 (Accumulate; TP: $3.55) replaces SingTel as our most preferred stock in the  sector,  as  M1  stands  to  gain  the  most  from  improving mobile  dynamics  in  Singapore.  M1  also  benefits  from  fibre broadband growth  on increasing broadband customer base. M1 had guided for FY14E capex to be around current FY13 capex  level  at  S$130  million.  We  think  this  may  lead  to higher  free  cash  flows  in  FY14E,  improving  its  ability  to increase dividends in the near term.

SingTel (Accumulate; TP: $4.06) reported stable earnings in the last quarter  despite lower  revenue,  due  to  better  EBITDA  margin  on  effective cost management. It  continues  to have strong growth in its associates’ earnings on constant currency terms. However, weakening foreign currencies outlook remain a challenge for SingTel, which may lead to earnings growth being eroded.

On StarHub (Accumulate; TP: $4.52), key concerns would  be on increasing Pay TV content  costs  and  competition  with  SingTel’s  mio  TV. Management  continues  to  guide  its  Pay  TV  as  a  viable business  as  it  seeks  to  improve  its  value  proposition  to customers on content differentiation.

Source: PhillipCapital Research - 9 Dec 2013