Sector Overview

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

What is the news?

Telcos reported gain in revenue in the last quarter, with StarHub’s and M1’s lifted by mobile growth and fixed services while SingTel gains across its Group Consumer, Enterprise and Digital Life segments.

Strong net profit gains from SingTel and M1 in the last quarter. StarHub reversed declining earnings trend and posted modest earnings growth in the last quarter.

Dividend yields of above 4% from Telcos remain attractive in our view, with potential growth in dividends.

We continue to like M1 as our preferred pick, with a Buy rating in view of firm growth fundamentals. We upgraded SingTel to Accumulate in our last update report while we have Neutral on StarHub.

Key Risks

• Threat of new entrants in Singapore mobile market.
• Return FX currency headwinds and heightening competition in overseas markets for SingTel.

Potential Upsides

• Lowering of handset subsidies.
• Bottom-out in declining voice and roaming revenue.
• Possible trend towards customers upgrading from basic-tier to mid-tier plans for higher data allowances.
• Softer competition in Singapore broadband segment.

Outlook for the Sector

We remain positive on the Telco sector, expecting Telcos to deliver earnings and dividends growth into FY2015. Increase in mobile plan prices and further exceeding of data allowances among consumers would lead to continued growth among the Telcos. M1 remains our top pick as it stands to benefit the most from growth in mobile and fibre broadband services. Albeit StarHub suffered from an intense broadband competition, but has shown recovery to growth for its Pay TV business in recent quarters. SingTel continues to deliver moderate earnings growth despite adverse FX movements and benefits from recent turnaround in Optus, stabilising FX movements against SGD and strong gains from associates. Though M1 remains our top pick in the sector at present, we think SingTel may offer greater growth potential over the other 2 Telcos in the medium to long-term investment horizon in view of a saturated mobile market in Singapore.

Source: Phillip Securities Research - 16 Dec 2014