• Only Singtel met our expectations
• Sector remains under pressure
• Switch to our preferred pick

Wrapping Up 4QCY17 Results Season

All three listed telecommunications service providers (telcos) in Singapore ended CY17 with muted results pointing to one direction – heightened competition in a saturated market translating to underperformances. Apart from Singtel’s 9MFY18 results that met our expectations, both Starhub and M1’s FY17 results missed our expectations. For M1, FY17 revenue growth (uplift from larger customer base and higher ARPU of fixed services) was offset by higher operating expenses due to higher wholesale costs of fixed services, resulting in slightly disappointing NPAT and EBITDA.

For Starhub, FY17 NPAT (-27%) missed but EBITDA (-11%) met our expectations on lower service revenue (despite strong enterprise fixed growth) and higher operating expenses.

Lastly, Singtel was the only one with results which met expectations, as 9MFY18 operating revenue (+7%) growth was driven by Australia consumer and digital life businesses. Despite the plunge in pre-tax profits of its associate in India (-54%), Singtel’s 9MFY18 NPAT only fell 5.2% YoY to S$2.74b, which formed 71% of our FY18 forecast.

Gloomy Sector Outlook

Looking ahead, the telecom sector will remain under pressure with the entry of two new Mobile Virtual Network Operators (MVNOs) as well as the impending entry of TPG. In a saturated market, we expect mobile ARPUs and broadband ARPUs to decline ahead, translating to weaker service revenue for the telcos. Consequently, while correction of the share prices of the three telcos started since mid-CY16, we believe valuations do not accurately reflect the fundamental outlook of Singtel and Starhub.

Based on the closing price on 20 Feb 18:

1) we deem M1’s [HOLD; FV: S$1.70] valuations fair with forward P/E and forward EV/EBITDA trading at 0.7sd and 1.2sd below 5-year averages, respectively, reflecting its muted outlook,

2) Starhub’s [SELL; FV: S$2.20] valuations seem high with forward P/E and forward EV/EBITDA trading at 0.9sd above and only 0.4sd below 5- year averages, respectively, and on the contrary,

3) Singtel [BUY; S$4.15], the dominant telco in Singapore and also the one with the most diversified earnings base among the three, is trading with forward P/E, forward P/B, forward dividend yield and forward EV/EBITDA at 1.9sd below, 2.8sd below, 2.4sd above and 1.5sd below 5-year averages, respectively.

This disparity in valuations between Singtel and Starhub is tremendously unjustifiable, especially since Singtel has the more resilient earnings outlook, in our view.

Makes Better Sense to Switch to Singtel

While Starhub’s forward dividend yield is trading at 1.3sd above 5-year average, we are unconvinced for now of its ability to sustain its 4- S-cents per quarter dividend beyond FY18. Hence, based on current (20 Feb 18 close) valuations, we recommend investors to switch out of Starhub and into Singtel, given Singtel’s diversified and more stable earnings base.

We reiterate our positive view on Singtel’s longerterm outlook given its focus to grow its cyber security, ICT solutions capabilities, digital advertising and other digital-related businesses. All considered, maintain NEUTRAL on the Telecom sector.

Source: OCBC Research - 21 Feb 2018