TELCOs – OCBC

Still key defensive stocks

Macroeconomic issues in 2009. Going into 2009, the whole stock market will continue to face many challenges, most of them coming from the macroeconomic front. Besides having to contend with a global economic slowdown, investors will also encounter continued uncertainty brought on by the financial meltdown and credit crunch, currency instability, and increased volatility in the stock markets. In such a highly unpredictable climate, we believe that a flight to quality is not enough – investors should also focus on defensiveness of earnings as well as sustainable dividend payout abilities and most of the Singapore telcos meet these criteria. As such, we continue to maintain our OVERWEIGHT rating on the sector.

Oct sell down brings value. Telco stocks have managed to hold their own for most part of the year, outperforming the STI index admirably. Since the start of the year to end-September, the STI index fell about 31.9%, but in comparison, SingTel was only down 18.8%, StarHub down 8.2% and M1 just 4.2%. However, following a chain of unfortunate events in October, both SingTel and M1 were sold down along with the overall market – SingTel lost about 25.2% of its value in that month alone, while M1 lost about 28.6%, versus the STI’s 23.9% fall. While most of them have recovered somewhat in November, SingTel is still trading around 38.3% lower YTD (Year-to-Date), StarHub is about 27.8% down, and 34.2% off for M1.

Healthy operating cashflows support dividends. While earnings are expected to take a slightly knock next year due to the recession, the slowdown should not have much of an impact, if any, on the telcos’ healthy operating cashflows. If anything, we expect more prudent capex spending and other cost-reduction measures to further improve operating cashflows and in turn, sustain the already attractive dividend policies. StarHub has committed itself to paying out at least S$0.18 of dividend (S$0.045 per quarter) this year and we expect the same, if not better, dividends next year. M1 has guided that it will pay out at least 80% of its recurring income as dividend – we believe this policy is sustainable in 2009. As for SingTel, it is seen as less of a dividend play but with its regional expansion strategy likely to adopt a more cautious approach, we see a higher chance of a special dividend – this was something that SingTel has consistently done in the past to return excess cash to shareholders.

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