TELCOs – BT

Cracks surfacing at the telco fort?

Japan’s disaster is shaking even stocks that used to help shelter investors from market turbulence

AN ebbing tide lowers all boats and this time around, even telecommunications counters that have helped shelter investors from past market turbulence appear to be reeling from aftershocks of the devastating earthquake which hit Japan last week.

Singapore Telecommunications, which is traditionally seen as a defensive play, also fell victim to the global market sell-down this week with its shares tumbling to a nine-month low of $2.85 yesterday.

‘Surprisingly, a number of incumbent telcos have been weak across the region despite the broader market volatility,’ said Sachin Gupta, a senior analyst at Nomura Securities.

Investors appear to be spooked by SingTel’s overseas exposure as global economies continue to be rocked by the uncertain fallout from Japan’s worst natural disaster in nearly 100 years.

The Republic’s largest operator derives 74 per cent of its Ebitda (earnings before interest, tax, depreciation and amortisation) from its Australian subsidiary Optus and its six mobile associates across the region.

‘SingTel is facing some uncertainties, especially on regulations in India and rising competition in the Australian market,’ Mr Gupta explained.

‘The sheer exposure of the group (SingTel) to overseas markets makes the stock susceptible to external volatility,’ said OSK Research’s telecommunications analyst Jeffrey Tan, adding that investors could also be worried about a potential loss in roaming revenue as traveller numbers start to dwindle.

‘SingTel has the largest pool of foreign shareholders and investors so it would be reasonable to expect the stock to suffer a bigger sell-down on the back of prevailing concerns in the region,’ he told BT.

Selling pressure also gripped SingTel’s US counterparts including AT&T, Verizon and Sprint Nextel this week. In the region, shares of Australian telco Telstra fell 0.38 per cent to close at A$2.64 yesterday.

The exception to the rule appears to be telcos with high and sustainable dividend yields, Nomura’s Mr Gupta noted.

Singapore’s smallest operator M1 is one such counter that is favoured by most market watchers. The company’s proposed cash payout of 17.5 cents per share for 2010 translates to a sizeable yield of 7 per cent.

M1 shares held steady for most of this week but edged down one cent to $2.38 yesterday. Both Nomura and OSK have a ‘buy’ rating on this counter.

StarHub received mixed ratings from analysts, with Nomura giving it ‘reduce’ call while OSK rates it as ‘neutral’. StarHub shares closed unchanged at $2.61 yesterday.

While Singapore’s second-largest operator is viewed to have a lower ceiling for growth compared to M1 this year, StarHub’s domestic focus and dividend yield should help limit its share price downside, analysts say.

Meanwhile, OCBC Research has a ‘buy’ call on all three local operators.

‘While we continue to like the telcos for their yields and defensive earnings, we do not see any big growth drivers for them this year and hence our sector call is neutral,’ said OCBC research analyst Carey Wong.

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