SingTel – DBS
iPhone and NBN
Story: We believe the iPhone launch on 22 Aug will not generate meaningful shake up in the market share as SingTel has priced it at a premium to the price in markets such as Hong Kong. We view the award of NetCo contract for National Broadband Network (NBN), expected in Aug-Sept 08 time frame, to be more significant.
Point: We highlight three key points for the sector.
(a) Margin recovery unlikely this year. Looking at current subsidies offered by StarHub and M1 on touch screen phones from Samsung and HTC, in anticipation of SingTel’s launch of iPhone, we believe that margin recovery would take time. Post-mobile number portability (MNP), we have not seen significant reduction in competitive intensity till now. Traditionally margins have always been lower in 4Q compared to the rest of the year due to festive promotions. This implies that, the earliest we can hope for margin recovery will be towards the beginning of 2009.
(b) NetCo award can have adverse impact on the whole sector. With the Netco award, market may focus on the fact that one of the two existing broadband networks can become redundant or obsolete due to NBN. With City Telecom’s exit from StarHub-led consortium, we have even higher conviction on SingTel-led consortium “OpenNet” winning the award due to its ability to upgrade SingTel’s existing network at lower costs. This implies that StarHub would be forced to run its existing network in direct competition with NBN. In the long run, even SingTel may see adverse impact on its broadband business (c.10% of group earnings) due to the regulated pricing environment.
(c) Capital management is the only silver lining in the sector. We understand that the magnitude of capex required by each player for NBN is quite limited as (i) capex spending would be spread over 2-3 years and (ii) each player has only 30% stake in the consortium. We have estimated annual capex spending by each player for NetCo layer to be around S$100m. We believe that M1 and StarHub can reduce their capital by 10% and 5% respectively with FY08 results. However, the likelihood of special dividends remains low as evident from their track record of preference for capital reduction.
Relevance: We prefer M1 to SingTel due to its attractive valuations and regular dividend yield of near 8%, which can be further enhanced by capital management. We think that M1 can easily meet FY08 street estimates, while SingTel may disappoint as management guidance of double-digit growth in earnings for associate is too bullish. StarHub is our least preferred stock due to its premium valuations of 14x FY08 earnings, which can only be justified for a company with double-digit earnings growth. We see slight decline in StarHub’s earnings this year and believe that large valuation gap between StarHub and M1 may no longer be justified.