TELCOs – OCBC

Still key defensive stocks

MNP concerns likely overdone. The initial worries over true mobile number portability (MNP) on 13 June in Singapore are likely to be overdone. For one, the initial fanfare over the MNP implementation appears to have since been scaled back, as seen by the drop in full-page equivalent advertisements in the month of August. While handset discounts remain attractive, these appear to have stabilized and we should see a reduction in acquisition costs over the next few quarters. Secondly, we have not seen any sign of a significant spike in monthly churns. 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. As such, we believe that there would not be any prolonged impact from the event.

Focus on NGNBN next. With MNP likely behind us, the next focus would be on the Next Generation National Broadband Network (NGNBN). The IDA (Infocomm Development Authority of Singapore) is set to announce the winner of the tender for the NetCo (Network Company – builder and owner of the fiber optic network) this month. With the recent replacement of StarHub as the consortium lead following the withdrawal of City Telecom Limited from Infinity Consortium, we believe this further shifts the odds towards OpenNet (led by Axia NetMedia) winning this two-horse race. As a recap, OpenNet proposes to leverage on SingTel’s existing extensive but dated ducting network and turn it into an ultra-fast broadband network. OpenNet also believes it can deliver a resilient tamper-proof fibre-to-thehome network at least 2.5 years ahead of the iN2015 vision schedule. IDA has also extended the closing for the RFP (request for proposal) for the OpCo (Operating Company) from 20 August to 29 September 2008.

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 still very uncertain times. We maintain our Overweight rating on the sector.

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