TELCOs – OCBC
2008 likely to be challenging year
Key drivers in 2008. Looking into 2008, Singapore’s telco sector is likely to face some issues. This includes S$ appreciation vis-à-vis other currencies, stock market volatility, nationalistic sentiment against sovereign company/fund investment, higher inflation rates. Against this uncertain climate, our stock selection criterion is defensiveness in earnings. We prefer telcos with pure Singapore exposure, high earnings visibility, high dividend payout and with a non-aggressive growth strategy.
Number portability encourages switching. Mobile Number Portability (MNP) will be introduced in 2008, and this is likely to be preceded by intensive competition to lock in existing and new customers. There is some evidence that aggressive marketing has already started, and this is reflected in some telcos’ willingness to sacrifice revenue growth at the expense of subscribers. Our OIR’s Economic Matrix shows this clearly. With anticipated competition, there is likely to be margin erosion. However, depending on the individual telcos growth strategy some could be affected more than others.
NBN: Does return justify investment? 2008 will see the bidding for the National Broadband Network (NBN). Investment in the NBN network is expected to run into the billions and its tariff charges are likely to be heavily regulated. The return is unlikely to be very high, as it is on a competitive bid basis, tariff charges are likely to be regulated, and return may not commensurate with the high investment costs.
StarHub reigns supreme in pay-TV market. In 2007, SingTel entered the Pay-TV arena with Mio TV. However, we do not see the take-up rate to be high and this perhaps explains SingTel’s promotion to offer free Mio TV with its broadband packages. We see Mio TV to need to revamp its content and differentiate itself to tap onto undiscovered demand to compete in the Pay-TV market.
StarHub and M1 our top picks for 2008. As we move into 2008, telcos are likely to face a challenging environment on both the macro and micro fronts. Our stock selection criterion is thus defensiveness in earnings. In that context, our preferred telcos are StarHub and MobileOne (M1).