TELCOs – OCBC

Defensive bet in these uncertain times

Frenzy over MNP. The introduction of true mobile number portability (MNP) on 13 June in Singapore was greeted with a big bash, with both SingTel and StarHub holding roadshows on 12-15 June, in conjunction with the PC Show 2008. Also evident were the blitz of full page advertisements from all three telcos, dangling attractive sign-up freebies and discounts, both in a bid to retain their existing subscribers and attract new subscribers. In addition, the telcos have taken to slashing prices for even the latest and hottest mobile phones by as much as S$600, versus the typical subsidy of around S$300-400/handset previously. This is expected to further increase the acquisition cost per subscriber, which has already seen significant increases in the previous quarter; for example, SingTel’s postpaid customer cost jumped 40% YoY to S$313 in the March quarter; StarHub’s acquisition cost rose 35% to S$124 in the same quarter.

Churn rate likely to rise. Although the churn rates are likely to increase in the next few months after the start of MNP, from about 0.8% for SingTel, 1.1% for StarHub and 1.3% for M1 in the March quarter, we do not expect any large migration of users. First, there is not much to choose between the operators in terms of services; secondly, the majority of subscribers are already locked-in to two-year contracts. More importantly, none of the telcos has actually made any price adjustments to their subscription plans, thus reducing the risk of a debilitating price war. Nevertheless, we are looking for some margin compression for the next few quarters, and will be adjusting our estimates accordingly after we see the June quarter results.

Defensive bet in these uncertain times. Going forward, we continue to expect flat to steady topline growth for the three telcos, even if there is a slowdown in the economy, as the usage of mobile phones has become an integral part of our daily lives. This can be seen in the high penetration rate that Singapore has achieved over the past few years, where it has been hovering above 100% since Sep 2006. And with their strong cashflow generating abilities, we believe their good dividend yields, at least for both M1 and StarHub, would be a good defensive bet in these uncertain times. We maintain our Overweight rating on the sector.

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