TELCO – DBS

Big brother’s guidance positive but no near term catalysts

SingTel aggression not for long term: We do not subscribe to the view that SingTel would continue to be aggressive on market share gains for bigger scale that could be useful for National Broadband Network (NBN). Its experienced management is well aware of the fact that competitive response would halt its advance and hurt earnings of all players including its own.

Market share focus was a tactical move. We believe that SingTel focused on market share gains last year in order to (1) re-contract post-paid subscriber base three to six months ahead of full mobile number portability (MNP) introduction in June 08 (2) re-position itself to capture growth in the rapidly growing pre-paid mobile segment. It was a tactical move that paid off initially but strong competitive reaction rendered the move ineffective as SingTel’s EBITDA for Singapore declined 1% despite strong 10.7% revenue growth in 1Q 2008.

Margins should improve in 2H 2008 as evident from SingTel’s guidance for Singapore. There is hardly any room for SingTel’s Singapore margins to drop further given its stable margin guidance for Singapore in FY09. In the near term, we expect the three Telcos to report lower EBITDA margins YoY but higher QoQ in 2Q 2008 due to MNP from June 08. However, we expect to see margins reverting back to healthy levels in 2H 2008, when operators would be done with re-contracting their subscriber base. This is also reflected in the stable margin guidance issued by StarHub and M1.

SingTel involves risk of overpayment for overseas acquisitions. SingTel is under pressure for making overseas acquisitions in order to deliver on its guidance of double-digit earnings growth in the medium term, which we think is not possible without new acquisitions. However, acquisitions are no longer cheap with the rush among big global Telcos to acquire companies in emerging markets that may not be earnings accretive initially.

Downgrade the sector call to neutral with M1 as top pick. M1 is cheap at about 11x FY08 PER compared to 14.8x for StarHub and 14.7x for SingTel. Its dividend yield is highest among all the Telcos at 7.4% compared to 5.7% for StarHub and 3.4% for SingTel. StarHub trades at about 35% premium to M1’s PER valuations and the expected news flow on NBN could have an adverse impact on StarHub given that NBN would break StarHub’s and SingTel’s broadband duopoly with M1 as the chief beneficiary.

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