• Stable earnings outlook
• Yields average around 4.5%
• SingTel is our top pick

Telcos maintain stable earnings outlook

All three telcos have largely kept their outlook for the rest of this year unchanged after reporting their Mar quarter results, with most expecting stable to moderate earnings growth, supported by increased mobile usage as more customers upgrade their smartphone phone plans or exceed their data bundles. Specifically, M1 sees moderate earnings growth within the single-digit range; SingTel expects core business revenue to remain stable while EBITDA grows by low single-digit level; StarHub guides for single-digit service revenue growth with a 32% EBITDA margin.

Mobile ARPU uplift still taking time

While mobile market continued to see more net adds (more importantly in the postpaid segment), we note that ARPUs have remained sluggish. While the telcos said that lower roaming revenue had an impact, the issue could be structural as more people use social media/instant messaging to communicate in lieu of the traditional voice and SMSes. Also, attempts to monetize data could still take time.

Depressed broadband ARPUs

But more worrying is the intense price competition in the consumer broadband market, which further depressed ARPUs in the Mar quarter. While S$39/month had been the floor for a while, M1 may have just initiated another round of price cuts; this after offering its basic 100Mbps plan at just S$29/month. We believe the smaller RSPs are likely to follow suit, resulting in further margin erosion for the incumbents.

2014 FIFA World Cup in Jun

Over in the Pay TV space, the 2014 FIFA World Cup will take centre stage in Jun; but with SingTel securing the content on an exclusive basis, it should reap the most benefit from the event, although we do expect a drop in viewership due to the higher price (S$112 versus S$88 in 2010). However, subscribers can opt to extend their existing mio TV contracts or BPL contracts to watch these matches for free, effectively locking them into longer contracts with SingTel.

NEUTRAL on sector

Despite a likely dull earnings outlook this year, the forecast yield of around 4.5% should still have some attraction for yield seekers and hence we maintain our NEUTRAL rating. Our top pick is still SingTel (BUY, S$4.00 FV under review).

Source: OCBC Research - 11 Jun 2014