TELCOs – CIMB
SingTel responds with new iPhone plans
Maintain Underweight on Singapore telco sector. Two days after M1 and StarHub launched their iPhone packages, SingTel has countered the competition by cutting prices and increasing its data bundles. SingTel has mostly matched M1’s handset prices (already more aggressive) by adjusting prices by -29% to +11%. SingTel also sharply increased its data bundles to match those of its rivals, but did not tweak its monthly subscription fees. All in all, we do not expect SingTel’s counter-measures to spark an escalation in the subsidy war. We remain UNDERWEIGHT on the sector, given myriad risks from competition and our house preference for cyclical sectors. Our top pick is still M1, rated a NEUTRAL with an unchanged DCF-based target price (WACC: 9.5%) of S$2.07 as we prefer it for its capital-management potential in 2010 and greatest potential upside from NGNBN.
Matching its rivals. Two days after M1 and StarHub rolled out their iPhone packages, SingTel countered the competition by cutting the prices of its iPhones and increasing its data bundles. The key changes are:
- SingTel has mostly matched M1’s (already more aggressive pricing) handset prices by adjusting its prices by -29% to +11%.
- SingTel also sharply raised its data bundles from 0.5GB-3GB to 12GB-30GB to mostly equal the offerings of M1 and StarHub. M1, in retaliation, nudged up its lowest- and mid-tier data bundles from 10GB to 12GB to match those of SingTel.
- But SingTel did not adjust its monthly subscription fees, nor did it change the free local calls and SMS in its old plans which its rivals had matched.
All in, SingTel’s revised plans are not much different from those of its competitors andwe do not expect its rivals to further up the ante.
Valuation and recommendation
Maintain UNDERWEIGHT with M1 as top pick. While a subsidy war does not appear to be brewing, we retain our UNDERWEIGHT position on the sector as we see myriad risks relating to competition and given our house preference for cyclical sectors. Among the risks are further ARPU erosion in broadband for SingTel and StarHub, higher content costs at SingTel, and risks of losing more compelling content at StarHub.
We maintain M1 as our top pick in the sector for its capital-management potential and upside from NGNBN. We continue to rate it a NEUTRAL with an unchanged DCFbased (WACC: 9.5%) target price of S$2.07.
StarHub is our next preferred stock, similarly rated a NEUTRAL with an unchanged DCF-based target price of S$2.15 (WACC: 9.7%) as we like its attractive yields and strong free cash flow yields of 10-11%, though offset by a lack of re-rating catalysts and a likely erosion of its residential broadband business.
SingTel is our least preferred stock due to expected weaker margins in Singapore and concerns over competition in India and Australia. We rate it an UNDERPERFORM with an unchanged sum-of-the-parts target price of S$3.30.