1QCY10 Scorecard; Maintain Overweight

1QCY10 results show margin compression. All three telcos – MobileOne (M1), SingTel and StarHub – showed signs of margin compression in their 1QCY10 results recently, no doubt hit by higher handset subsidies for highly sought-after “smartphones” like the Apple iPhone 3GS. Still, the strongerthan-expected demand for these smartphones saw revenue coming in ahead of our estimates.

Review of operations. As a result of the higher handset subsidies, acquisition costs for all the three telcos have risen quite sharply, and they are expected to remain relatively high as smartphones remain hotly sought after. Meanwhile, consumer spending (ARPU) has dipped slightly in 1QCY10 but we note that this is mainly due to the shorter Feb month as well as the Chinese New Year festivities. On the broadband front, while both SingTel and StarHub have managed to increase their subscriber base, the ARPUs have declined. For Pay TV, StarHub continued to add new subscribers, as did SingTel, but StarHub’s ARPUs have come down and may continue to decline in 2HCY10.

Major Pay TV revamp. Still on Pay TV, the government initiated a major revamp in the industry by requiring Pay TV providers to cross-carry each other’s content that is acquired or renewed on an exclusive basis. In short, Pay TV customers will be able to watch all Pay TV content with their preferred operator and need not pay any extra fees for doing so. Given StarHub’s much larger installed base, we believe the latest development is slightly more positive for StarHub. We also think that the move may provide an opening for other players like M1 to enter the market without having to spend too much on building their own Pay TV infrastructure.

Stable outlook for 2010. Going forward, all three telcos expect their Singapore operations to remain stable or show slight growth, but most note that EBITDA margins are likely to decline slightly this year; StarHub for example, expects its EBITDA margin to hover around 28% vs. the historical average of 32-35%. Nevertheless, due to their strong cashflow-generating businesses, the telcos have largely kept their dividend payout guidance: M1 to pay at least 80% of underlying net profit; SingTel to pay 45-60% of underlying earnings; StarHub to pay S$0.20/share, or S$0.05/share per quarter.

Maintain Overweight. In light of the increased volatility in the market due to the ongoing uncertainties in Europe, we continue to like the telcos’ defensive earnings and relatively attractive dividend yields. Maintain OVERWEIGHT.

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