• Defensive business as usual
• Dynamics could change; but not majorly
• Yields are still important

4Q15 earnings mostly in line

For the Dec quarter, the three telcos reported results that were mostly in line with our expectations, despite seeing YoY declines in earnings. StarHub saw the largest drop of 14% in earnings, while both M1 and Singtel suffered a 2% drop. However, StarHub’s FY earnings were about 0.9% above our forecast, M1’s was 1% below; Singtel’s 9M earnings met 73% of our FY estimate.

Entry of potential 4th telco

Overall mobile market continues to be stable, with penetration rate remaining high at around 149%. Singtel continued to dominate with a 48% market share, followed by StarHub (27%) and M1 (26%). However, the dynamics could be due for a change, after the IDA went ahead with plans to increase competition in the market; this by setting aside a block of the much sought-after 900Mhz spectrum with a lower reserve price of S$35m in the upcoming auction in 3Q16 for a potential new entrant. However, a new entrant would need deep pockets to get the network up and running by 3Q18.

Focus still on dividends

With the odds of a sustained series of Fed rate hikes fading, the market seems to have rekindled its focus on good yield plays; this can be seen in the recent strong run-up in REITs and also the telcos. However, any risk of a cut in dividend would not be well received by the market and M1 has felt the full blunt of that after it cut its final dividend recently, causing its share price to tumble 16% to a recent low of S$2.19.

Maintain OVERWEIGHT

Having said that, we still like the defensive nature of the telcos’ business, especially as the global economy continues to head into a period of slower growth. While roaming revenue could continue to dip, the core mobile business should still do well, supported by increasing data usage. As before, the entry of a fourth MNO is not a given and even then, we see limited impact on the existing telcos for now. Maintain OVERWEIGHT and Singtel remains our top pick.

Source: OCBC Research - 15 Mar 2016