Telecoms – CIMB

Robust fundamentals remain underappreciated

• 2007 review: StarHub led EBITDA growth; SingTel gained subscriber share; M1 fell behind. All three telcos benefited as sector revenue growth accelerated to 9% yoy (2006: 7% yoy) on the back of a growing population and rising ARPU from higher usage of telco services. However, sector margins were compressed as SingTel took advantage of the strong demand to pursue market share aggressively. StarHub leveraged its triple-play proposition to deliver the strongest EBITDA growth of 12% yoy. SingTel was the biggest winner of mobile subscriber market share but its EBITDA was flat yoy while M1’s EBITDA declined 3% yoy as its pure-play mobile proposition continued to be marginalised by competitors’ bundled offerings.

• 2008: topline growth with stable margins. We expect population growth and rising ARPU to drive sector topline further (+8% yoy) in FY08. SingTel is expected to keep competition keen in its pursuit of further subscriber share but competition is unlikely to escalate very much from here. Margins should be relatively flat yoy in 2008 as telco operators focus on cost-efficiency gains to offset incremental subscriber acquisition costs. We expect StarHub to post the strongest EBITDA growth of 12% yoy again in 2008 on the back of ARPU growth.

• Attractive yield support from robust free cash flow. Singapore telcos are generating robust free cash flow and remain below their capital-structure targets. We believe there is flexibility to return the entire free cash flows to shareholders while keeping sufficient ammunition for strategic investments. We expect the sector to deliver an average yield of 7.4% for 2008 with StarHub offering the highest prospective yield of 10%, funded mostly by free cash flow. This should be followed by M1 and SingTel with prospective yields of 8% and 4.5% respectively.

• Mobile number portability (MNP) and Next Generation National Broadband Network (NGNBN) are unlikely to worsen competition. Downside risk from MNP is limited as industry players had taken the necessary steps to defend their subscriber base through the most of 2007, as reflected in higher subscriber acquisition costs. We also believe that NGNBN is unlikely to induce margineroding competition, based on our analysis of NGNBN’s business model, the government’s objectives and incumbents’ competitive advantages.

• Maintain Overweight with StarHub as our top pick, followed by SingTel. We expect telcos to continue to outperform the STI in view of an extended period of market risk aversion. StarHub offers ARPU-driven EBITDA growth potential combined with strong capital-return potential. We have above-consensus dividend/capital return expectations of 10% for StarHub. SingTel offers liquid exposure to reliable earnings growth from blue-chip regional associates and a decent yield of 4.5%. Potential news flow on bids for Vietnam’s telco assets in 2H08 could provide share-price catalysts. M1 remains a highly defensive yield stock with prospective yields of 8% but lacks catalysts.