TELCOs – DBS

Structural rise in competition?

• Our checks indicate rising competitive intensity in the sector, and we see this as a trend rather than exception next year.
• We lower M1’s FY10F earnings by 6%, now 2% below consensus. Our StarHub’s FY10F earnings are 5% below consensus. Given that M1 offers 7.3% yield with stable earnings prospects, investors may seek higher yield of atleast 9% from StarHub due to the challenges ahead. Downgrade StarHub to FV and M1 to HOLD
• For SingTel, its Indian associate Bharti retaliated with lower tariffs in the second week of October. We trimmed SingTel’s FY11F earnings by 3%, now 4% below consensus. Maintain HOLD for SingTel with lower TP of S$3.20.

Intense competition for market share in the post-paid mobile segment. Our shop visits indicate that all the players are offering up to 50% discount on the published mobile data rates, implying that ARPU may not have much upside, while network capex may rise significantly, as data traffic typically consumes manifold network capacity than voice traffic. M1 and StarHub, on top of the usual handset subsidy, are offering discount of S$100 to the customers who switch from other operators. Broadband tariffs are also under pressure, as consumers prefer to stay with low-end plans. This may adversely impact the margins of all the players in the industry, in our view.

Higher competition may be a trend, not an occasional spike. We see competitive intensity going up rather than coming down in 2010. SingTel’s EPL pricing of S$23/month (compared to StarHub’s min S$25) despite higher content cost vindicates our fear of aggressive customer acquisition targets. Recently, M1 secured iPhone deal, raised its FY09F capex by 20%, and is keen to secure broadband subscribers through National Broadband Network (NBN) next year. StarHub faces an uphill task of defending its mobile and broadband market share, in the face of possible pay TV market share decline next year, in our view.

No excitement in the sector and too early for bargain hunting. M1 trades at 7.3% yield with stable earnings prospects. In our view, investors may seek potentially higher yield from StarHub, at least 9% yield, given risk of mid-single digit earnings decline in the next two years before it stabilizes.
SingTel trades at 4.5% yield with mid-single digit growth prospects, over the next two years, which appear to be reasonable in our view.

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