TELCOs – DMG

4Q08 in a nutshell

Hits & Misses. The Oct-Dec 08 period presented a mixed bag of results, with StarHub outperforming, SingTel coming in line, and M1 disappointing. All three showed improvements in the Singapore business and benefited from a moderating competitive landscape.

Balance sheet strong. Gearing appears high for the industry but should be no concern as it is a result of sound capital management over the past few years. Net debt/EBITDA (0.7-1.2x) and EBITDA/Interest (19-42x) are at healthy levels.

Mobile margins improve. EBITDA margins have improved 2.0 ppt QoQ as the telcos toned down on subsidies and advertising & promotions expenses. Prior to which, the mobile business was on a declining trend, no thanks to the red-hot competition as the telcos fought hard to gain market share with the introduction of Mobile Number Portability (MNP).

ARPU lower for broadband, but higher for Pay TV. SingTel and StarHub have been slashing prices (and upping the goodies) to lock in customers before the roll-out of the NBN, upping the ante for M1. Meanwhile, StarHub’s Pay TV ARPU rose 4% to S$57 per month despite competition from mio TV.

What to look out for in the coming months? The OpCo results will be out by the end of 1Q09, and we expect the contest to be close. The impact of NBN as well as retrenchments should also be felt by telcos this year.

Still stellar yields. Telcos still offer one of the best yields in the market. Among the three, only StarHub has given an explicit guidance on its dividend payout for the current year (S$0.18 per share). Both SingTel and M1 have instead stuck to a range. On average, the industry is yielding 6.9%, attractive compared to the market average of 5.5%. We maintain our OVERWEIGHT call on the sector, with StarHub as our top pick.

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