TELCOs – CIMB
Margin compression weighs in
• Margin concerns overshadow consumption growth optimism. EBITDA margin compression in 1QCY08 exceeded our expectations and Singapore telcos are now in unchartered waters with sector EBITDA margin at an all-time low of 34.6%. We believe that the systemic margin pressure exerted by SingTel is unlikely to ease soon and will overshadow telco service consumption growth in Singapore. Sector PBT growth is set to slow to 8% for 2008-09 as a result, down from 10% previously.
• 1QCY08 results review. SingTel’s market-share drive took its mobile subscriber share to 43%, the highest in 17 quarters. This came at the expense of sector EBITDA margin, which was driven down to 34.6% (-280bp yoy). StarHub was forced to respond to an aggressive SingTel, resulting in its sharpest EBITDA margin erosion (-200bp yoy) to date. M1 averted yoy EBITDA margin erosion with the help of a low base from heavy 10th anniversary promotions the year before.
• Will SingTel’s aggression ease soon? We would not bet that competition will ease once mobile number portability (MNP) comes on stream. We believe SingTel is in the midst of a strategic repositioning ahead of the rollout of a national broadband network and the push for market share could be extended. Market share offers SingTel the scale of return for strategic growth initiatives/investments e.g. pay TV content, upgrade of fixed network, new wireless services. This sets SingTel up to generate potentially better returns for future investments relative to StarHub and M1.
• Yields offer respite for StarHub and M1. StarHub and M1 continue to offer prospects of more than 8% yields on robust free cash flow. Earnings risk should be limited by SingTel’s EBITDA margin guidance of 40% (flat yoy) for FY09, which suggests that sector margins could stabilise during the course of the year. However, we do not expect a significant margin recovery in 2008-9.
• Maintain Neutral on the sector. In the current environment of increased competition within Singapore, SingTel’s diversified earnings base offers better downside protection than its peers. Singapore is only 30% of its earnings versus 100% for M1 and Starhub. It also has potential near-term re-rating catalysts from the MTN acquisition with Bharti. Between Starhub and M1, we prefer StarHub over M1 for its more diversified earnings. As a dividend yield hideout, our strategist prefers Media and S-REITs, over Singapore Telcos. Among regional telcos, our preference is for TM International.