TELCOs – CIMB
4Q09 results round-up
• No surprises in 4Q09; maintain UNDERWEIGHT. 4Q09 results of all three Singapore telcos were fairly in line, with typical seasonality. Highlights were: 1) rather poor service revenue growth although mobile revenue continued to improve; 2) weaker margins; and 3) continued ARPU and revenue pressure in fixed broadband and corporate data. We retain our UNDERWEIGHT position on the sector as we remain apprehensive about rising content costs, pressure on broadband ARPUs and escalating subsidies. While we leave our DCF-based target price of S$2.07 (WACC: 9.5%) intact, we downgrade M1 from Outperform to NEUTRAL as it has outpaced the market by 9% since our upgrade and our house continues to prefer higher-beta and cyclical stocks. Nevertheless, M1 remains our top Singapore telco pick for its capital-management potential and greatest upside to NGNBN. Avoid StarHub (UNDERPERFORM, TP: S$2.14) and SingTel (UNDERPERFORM, TP: S$3.30).
• Weak service revenue… Service revenue growth decelerated to +1.3% yoy in 4Q09, the second lowest ever, due partly to competition despite a recovering economy. M1’s mobile revenue was weak from lower voice usage and roaming in postpaid and IDD revenue. StarHub’s fixed broadband and corporate data revenue came under pressure from competition while SingTel’s IDD revenue was lower from lower rates. Mobile revenue grew 5% yoy in 4Q09, driven by growth at SingTel and StarHub from their larger customer bases.
• …and margins. EBITDA margins slipped from seasonality and iPhone-induced SACs. With M1 and StarHub launching iPhones, industry EBITDA margins fell 2.6% pts qoq to 33.5%, the lowest since we began keeping records in 1Q04. Fixed broadband and corporate data revenue remained weak as competition remained rather heavy in those business verticals.
• Uninspiring outlook. M1 and StarHub gave fairly lacklustre 2010 guidance but we believe M1 is low-balling expectations. We believe Singapore telcos will benefit from the recovering economy and rising tourist arrivals with the opening of two integrated resorts. M1 should benefit the most as it is a pure mobile operator. SingTel has maintained its muted guidance of low-single-digit growth for revenue and EBITDA for FY3/10 which should easily be achieved with the help of A$ strength and strong growth in its IT and Engineering division from NGNBN rollout. On the downside, we expect competition to stiffen in the residential and corporate broadband markets throughout this year while content costs should remain a medium to long-term issue. We do, however, expect heavy subsidies for devices to persist in line with recent trends.