TELCOs – CIMB
A less bumpy ride on the way up
• 3QCY07 results in line, Singapore telco service consumption growth intact. Earnings for the three telcos came within our expectations. The key positive was robust 9.5% yoy revenue growth for the sector, driven by mobile and broadband, which both grew 12% yoy. The key negative was margin pressure due to unique factors at SingTel (strategic initiatives and increased contributions from low-margin IT sales) and StarHub (lag in passing on higher BPL costs). Overall, Singapore’s telco service consumption growth remains intact on the back of an immigration boom and a robust domestic economy.
• Positive outlook for 2008. The migration boom and the fastest rise in wages in seven years provide a promising backdrop for telco services for 2008. In addition, we expect wireless broadband and 3G services to provide upside to growth expectations on greater availability and affordability of user-friendly 3G handsets as well as the introduction of service innovations such as capped data plans. Margins in 2007 hit a low and we expect improvements in 2008. However, the scope of margin expansion should be capped by structurally higher retention costs with mobile number portability (especially at SingTel) and no let-up in intense but rational competition.
• StarHub and SingTel should be the biggest winners. Although all three telcos should benefit from subscriber growth, StarHub stands out for its potential ARPU growth (postpaid mobile and pay TV) while SingTel should be driven by mobile subscriber market-share gains. StarHub’s best-in-class bundled offerings make it the best stock to own for telco service consumption growth in 2008. We expect M1 to be increasingly marginalised for lack of bundling capability.
• Robust free cash flow yields supportive of above-consensus prospective yields. We reiterate our view that there is significant scope for consensus to re-rate dividend expectations for the Singapore telco sector. We expect the sector to deliver an average CY08 dividend yield of 8.4% (consensus: 6.0%), fully backed by free cash flow from robust topline growth, limited capex and strong balance sheets.
• Maintain Overweight; StarHub our top pick, followed by SingTel. Singapore telcos offer attractive risk-reward in terms of historical EV/EBITDA valuations. The sector also offers reliable earnings from an immigration influx, the proliferation of 3G/wireless services etc. Finally, downside risks should be limited given hefty prospective yields on robust free cash flow. Key risks are irrational competition and NBN but these are on the low side. StarHub is our top pick for its bundled offerings and greatest scope for upside surprises on the ARPU front. SingTel is our next preferred pick for prospective subscriber market-share gains in Singapore and exposure to high-growth regional markets.