TELCOs – CIMB

1Q10 results preview

Maintain UNDERWEIGHT. We maintain our UNDERWEIGHT stance as we do not expect any positive surprises in the upcoming 1Q10 results. We also remain concerned given the rise in content cost in the short-term, the pressure on broadband ARPUs and escalating subsidies from strong smartphone take-up. Our top pick in the sector remains M1 (TB, TP: S$2.26) as it would have the most capacity for capital management, the biggest upside from NGNBN and the most to gain from the recent content carry regulation. We retain our UNDERPERFORM recommendation on SingTel (TP: S$3.30) and StarHub (TP: S$2.14).

No real shocks in 1Q. Competition stayed fairly benign across the major product groups, in our view. While 1Q service revenue typically declines, we believe that 1Q10 service revenue was flattish due to the improving economy, which powered higher usage and roaming, coupled with the increasing take-up of wireless broadband. However, we believe that overall revenue would have grown on the back of a full quarter’s worth of iPhone sales. EBITDA margins should fall, in our view, due to iPhone subsidies, especially for StarHub and M1.

Expectations for operators. We estimate M1’s revenue rose by 2-3% qoq, helped by a full quarter’s worth of iPhone sales, the recovering economy and the increasing take-up of wireless broadband. While 1Q usually sees less marketing and acquisition costs, we think that the full quarter’s worth of iPhone subsidies would have negated that impact. As a consequence, we think that EBITDA margins dropped by 1-2% pts on a qoq basis, leading to a core net profit decline of 0-6%. M1 is scheduled to announce its 1Q10 results this Friday, 16 Apr. For StarHub, we think it will report revenue growth of 2-3% on a qoq basis, aided by the iPhone launch and the return of take-up for its more discretionary services. As a result, we think that a full quarter’s worth of iPhone subsidies would have caused EBITDA margins to range between flattish growth to a 0.5% pts drop, leading to a core net profit fall of 2-7% on a qoq basis. StarHub will announce its results on 6 May 2010.

A fourth entrant? We view the likelihood of a fourth entrant as slim, following the proposed release of more 3G spectrum, because i) Singapore is a small and mature market, and ii) the new entrant would need deep pockets to build up a nationwide network, especially in-building coverage.

OpCo progress running on time. Based on our recent meeting with NucleusConnect (NC), we gather that its rollout is progressing smoothly and on time. It is ready to launch its two central offices and the interoperability lab next month. It is seeing some fairly strong expressions of interest from retail service providers (RSPs) although it expects only a dozen or so to sign up. While no official confirmation has been given, NC expects a second OpCo to be constructed by SingTel, which is in line with our view. NC is anticipated to break even at the cashflow level only by 2015 or 2016.

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