TELCO – OCBC

Value plays with attractive yields

Entering into new era with NBN. Singapore will start rolling out the Next Generation National Broadband Network (NBN) from 2010 onwards as part of its NI2015 Master Plan. SingTel and StarHub will have big roles to play – the former as the NetCo (in charge of rolling out the fiber connections)  and the latter as the OpCo (responsible for designing, building and operating the active infrastructure). The broadband connectivity will then be packaged and resold by RSPs – with MobileOne (M1) likely to be one of them – to end users. As such, we expect to see some shakeup in the fixed broadband and network services segments.

Big shakeup in Pay TV arena. Another area of big changes will be in the Pay TV arena, especially in the sports segment. SingTel has recently won the exclusive broadcast rights for the English Premier League for the 2010-2012 seasons; it has also scored a coup by luring ESPN STAR Sports (ESS) from StarHub from mid-2010. But StarHub has responded with two free sports channels of its own and may have cards up its sleeve to combat subscriber defection. And with the NBN and its higher bandwidth capacity, we can expect the content-on-demand market to hot up as well.

Status quo for mobile segment. As for the telcos’ mainstay business, we pretty much expect things to remain status quo. Both M1 and StarHub have recently obtained the “rights” to distribute the Apple iPhone 3GS, breaking SingTel’s near 2-year monopoly on the much-craved smartphone. However, it is unlikely that M1 and StarHub would use the phone to gain market share but probably more to reduce their monthly churns. As such, we do not expect any debilitating price wars. And with the global economy slowly starting to recover, we may also see a modest rebound in core earnings.

Value plays with attractive yields. Stock markets around the world have recovered strongly since hitting multi-year lows in Mar 2009. But with the economies still lagging somewhat behind, significantly higher valuations may be harder to come by in 2010. Instead, investors may be keen to look for value i.e. at laggards with strong fundamentals, and the telcos fit the bill. We see their attractive dividends (mainly M1 and StarHub) as another plus point. We also believe that the rollout of the NBN from mid-2010 will bring new opportunities for all the three telcos. As such, we maintain our OVERWEIGHT rating on the sector.

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