Some disappointments ahead

Story: Telecom sector earnings are considered relatively resilient as consumers continue to spend on telecom services. However, lower corporate spending and the potential outflow of workers and tourists (typical pre-paid subscribers) in a slowing economy, lower roaming revenues from corporates and tourists, and not-so-benign competitive environment due to mobile number portability (MNP) are major concerns for the sector.

Point: We have reviewed the outlook for telco stocks under our coverage. Below are the key changes:

SingTel – earnings preview and revised earnings. On Nov 12, SingTel might report 2QFY09F underlying net profit of c. S$875m (-4% y-o-y, +1% q-o-q) that could disappoint the market. We lowered our FY09F and FY10F earnings by 5% each, and they are now 10%-12% below consensus.

StarHub – earnings preview and revised earnings. On Nov 5, StarHub might report 3QFY08F net profit of S$77m (-5% yo- y, +20% q-o-q), towards the lower end of street expectations. We lowered our FY08F and FY09F earnings by 2% and 3%, respectively, and they are now 6%-10% below consensus.

M1 – revised earnings. Our FY08F estimate is unchanged, but we lowered our FY09F profit by 4%. Our revised earnings are 4%-12% below consensus.

Relevance: Although StarHub has a better track record than M1, the 50-60% EV/EBITDA and PER valuation gaps may not be sustainable. Our below consensus FY09F earnings already reflect low expectations for M1. Hence, we do not advocate a valuation gap of more than 20-30%. We upgrade M1 to BUY with a revised target price of S$1.57 (Prev S$1.65) pegged to 10x FY09F PER, and downgrade StarHub to FULLY VALUED with a revised target price of S$2.34 (Prev S$2.50) pegged to 13x FY09F PER. At the current price, M1 offers sustainable 9.7% dividend yield compared to StarHub’s 6.8% yield. Concerns about a possible bidding war for the English Premier League (EPL) in late 2009 is likely to overshadow StarHub’s share price. Our trough valuation for M1 and StarHub are S$1.17 and S$1.67 respectively.

We maintain a HOLD rating for SingTel at a SOTP-based target price of S$2.84. But if we use the current market price (instead of target price) for some of the listed associates, SingTel would be worth S$2.42. We advise investors to accumulate SingTel towards our trough valuation of S$2.25.

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