TELCOs – DBSV

Three divergent trends

Voice, a major two-thirds slice of the mobile business, is rising for M1 but declining for StarHub.

Non-mobile business offers opportunities for M1 but poses challenges for StarHub.

M1 may pay more dividends on top of its regular dividend while StarHub’s commitment to regular dividends could be under pressure.

M1 is our top sector pick. Longer term, we like SingTel for Bharti’s recovery and potential for capital management with 4Q11F results.

Voice minutes declined at StarHub but rose at M1. Despite a much higher data contribution, StarHub’s 9M10 postpaid ARPU was up 1% yoy vs M1’s 5% yoy increase. This can be attributed to more than 16% decline in voice-minutes for StarHub over the last 7 quarters. Clearly, people are spending more time surfing the web than talking over the phone, impacting players with higher voiceminutes. Previously, most StarHub customers subscribed to highend plans with more voice minutes, but are substituting voice with data now. M1’s users, on the other hand, used lower voice minutes in the past and are now upgrading to high-end plans with data in lieu of higher smartphone subsidies. M1’s launch of per second billing in 2009 may have contributed to rising voiceminutes. SingTel’s voice-minutes have been stable.

Non-mobile business is likely to be up for M1 but down for StarHub. We project StarHub’s non-mobile EBITDA (40% of group EBITDA in 2010) to decline by 5%/3% in FY11F/12F due to the entry of new players in the broadband segment and more competition from SingTel, which is aiming to add >80K pay TV subscribers p.a. over the next 3 years. For M1, we project nonmobile EBITDA (2% of group EBITDA in 2010) to grow by 50%/25% in FY11F/12F on the back of its growing SME broadband business via the National Broadband Network.

Capital management potential at M1. M1 pays out only 80% of its earnings in dividends compared to StarHub’s effective payout of over 130% for FY10F. In our view, M1 could raise its regular payout ratio to over 90% or announce a 6%-9% yield in capital management on top of its regular 6% yield. We rule out capital management at StarHub and remain skeptical about the sustainability of its 20 cents DPS. In the longer term, we like SingTel for Bharti’s recovery and potential for capital management with 4Q11F results. A strong Singapore dollar, diluting overseas contribution is the key concern for SingTel in the near term.

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