2QCY10 Scorecard; Maintain Overweight

2QCY10 results show modest margin recovery. All the three telcos – M1, SingTel and StarHub – showed some modest recovery in EBITDA margins in their 2QCY10 results recently; but this was possibly due to the lull before the anticipated launch of the new iPhone 4G on 31 Jul. Both M1 and StarHub declared interim and quarterly dividend of S$0.063 and S$0.05, respectively.

Review of operations. And because of this lull, we note that equipment sales fell during the quarter, and this also brought acquisition costs for M1 and StarHub lower; although SingTel saw an increase. But with the increased usage of smartphones, we note that ARPUs have continued to rise for both SingTel and StarHub; though flat for M1. Meanwhile, there has been little change on the broadband front; we suspect some inactivity may be due to the impending roll-out of the NBN, which has been slightly delayed to 3Q10. On Pay TV, SingTel provided more colour on its mio TV segment, while StarHub managed to retain its subscriber base and ARPU in 2Q10. But we note there was some distortion due to the World Cup and 3Q numbers should give a clear picture of the landscape.

Stable outlook for 2010. Going forward, all the 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%. The telcos have also kept their earlier capex guidance or even reduced it slightly in the case of M1. And thanks to their strong cashflow-generative 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 unresolved uncertainties in Europe, the still floundering economic recovery in the US and potentially slowing economic growth in China, we continue to like the telcos’ defensive earnings and relatively attractive dividend yields. Maintain OVERWEIGHT. While we have BUY ratings on all three telcos, our preference is for M1 as we believe it has potentially the most to gain from the NBN in the coming two years. Meanwhile, we are also in the process of reviewing our fair value for StarHub.

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