Singapore TELCOs – CS

Go counter-consensus: hold M1 not StarHub

Event: We are assuming coverage of StarHub with an UNDERPERFORM rating relative to the Singapore market and a target price of S$2.92. While there is 0.7% upside to our target price, FY08 earnings growth is set to be considerably slower than the Singapore market (led by banks, property stocks and industrials). In contrast, we are assuming coverage of M1, consensus’ least preferred Singapore telco, with a NEUTRAL rating and a target price of S$2.40; 14.3% potential upside. Unlike StarHub, we believe that M1 is already priced for the low growth available in the industry.

View: After what we expect to be a brief reacceleration in revenue growth in FY07, growth rates are expected to resume a downward trend from FY08. With cellular penetration at 111.2%, we expect a revenue CAGR of only 1.8% from FY07-10. StarHub’s exciting brand and successful bundling strategy are expected to deliver 3.3% compound cellular revenue growth from FY07-10, versus only 0.7% growth from M1. However, this differential is sharply lower than the 12.6% CAGR StarHub achieved from FY04-07, versus M1’s 2.3% compound growth over the same period.

Catalyst: As M1 fights back in the cellular market, the 2Q07 results saw an upward revision in its guidance, StarHub’s remained unchanged. While StarHub enjoys dominance in Pay TV, SingTel has now entered the market and, if nothing else, is driving up content costs faster than StarHub’s Pay TV revenues. A significant downside shock could occur to StarHub and SingTel if the next generation network’s (NGN) plans result in new fixed lines being built; M1 can only gain if NGN is genuinely opened to resellers.

Valuation: As the sector growth rates slow, becoming increasingly “bondlike”, cash flow yield should become the key metric. StarHub is trading at an FY07 cash flow yield of 6.7%, while M1 is trading at 9.8%. On capital management, a target net-debt-to-EBITDA ratio of 2.0x in FY08 would allow a 13.4% additional yield from StarHub, but 23.3% from M1. We find this divergence too wide, given the converging (and slowing) growth rates.

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