TELCOs – CIMB

2Q09 results preview

• No surprises expected. We anticipate a fairly uninspiring 2Q where we project sector revenue growth of 3% and sector EBITDA to be relatively flat on a qoq basis. Specifically, we see revenues being relatively lifeless owing to stagnating usage patterns and weakness in roaming, IDD and migrant worker usage. The compensating factor, however, would be the growth in data services. Cost containment, while an ever-present theme, will face resistance from normalising
subscriber acquisition and retention cost (SAC) after a seasonally low 1Q09. Key themes to watch out for are a) normalising SACs, b) weak toplines, c) market share trends, d) cost containment and e) skirmishes in broadband.

• Expectations for operators. For M1, we think the key event would centre around their success in curbing, if not improving, their market share erosion which has now descended near their internal threshold. Thus, we anticipate revenue to decline by 1-2% for 2Q exacerbated by slower roaming, and weaker mobile usage among the migrant worker segment. We project EBITDA margin declines of 0.5-1% pts on a qoq basis leading to a net profit contraction of 9-10% sequentially. For StarHub, we see 2Q revenue declining by a smaller 1-2% relative to 1Q. We think that there could be multi-faceted threats to topline from its discretionary base which is
arguably more vulnerable to an economic slowdown. In terms of margins, we believe that there could be some slight pressure on margins owing to promotion campaigns and potential down trading. Thus, we believe that EBITDA margins would trend downwards slightly by close to 1% pts leading to net profit contraction of 5-7% qoq decline. SingTel Singapore should see a 4% qoq revenue rebound in 2Q09, on the back of wireless and wired broadband revenue. EBITDA margins should fall from the seasonally high 1Q09 of 37.6% to 36% in 2Q as subscriber acquisition and retention costs rise from its seasonal low.

• Maintain NEUTRAL on the sector. Given our more optimistic outlook on the stock market, we believe that telcos will not outperform the market. Hence, we advise investors to switch out of telcos into high beta cyclicals and reiterate our Neutral stance on the sector. That said, dividend yields are a prime downside supporter with average yields of 4-9% for CY09.

• Top pick is SingTel. Our top pick in the sector continues to be SingTel for its earnings turnaround, exposure to emerging markets and the strengthening regional currencies. We maintain our OUTPERFORM rating on the stock with a SOP-based target price of S$3.20. Potential re-rating catalysts include qoq earnings growth driven by the strong performances of its key associates. We advocate switching out of StarHub (Underperform, Target price: S$1.54) into SingTel as we believe its share price will come under pressure when bidding for rights to broadcast the Barclays Premier League begins in 3Q09.

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