TELCOs – OCBC

Steady as they go – maintain OVERWEIGHT

Decent 3CY11 showing. All the three telcos – M1, SingTel and StarHub – put in pretty decent showing in their 3QCY results recently, mostly meeting our forecasts, and largely demonstrating the defensive nature of their businesses. StarHub declared a quarterly dividend of S$0.05/share, while SingTel declared an interim dividend of S$0.068/share.

Review of Singapore operations. For the post-paid mobile market, there was no change to status quo – SingTel continues to dominate with a ~46% share, followed by StarHub with ~28% and M1 ~26%. Overall, the post-paid subscriber base here grew by some 55k QoQ to 3967k in the quarter, with the bulk coming from SingTel (+40k) while smartphones continued to be the phone of choice. However, we note that all three telcos saw higher monthly churn; monthly ARPUs have also declined for both M1 and SingTel but rose marginally for StarHub. The broadband segment was quite mixed, with SingTel adding 2.1% more subscribers, while StarHub saw a 1.3% fall; M1 revealed that it added 16k fiber customers, but did not reveal its overall broadband numbers. Finally on Pay TV, SingTel gained more traction in the quarter, while StarHub saw a marginal dip in subscribers; but we believe that content will determine growth.

4QCY11 outlook remains stable. Going forward, all the three telcos expect their Singapore operations to remain stable or show modest growth, buoyed by continued customer additions and increasing mobile data usage. We expect the three telcos’ EBITDA margins to remain around current levels – 42% for M1, 42% for SingTel and 30% for StarHub. All three of them have also kept their capex guidances unchanged. 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 55-70% of underlying earnings – recent interim dividend was 62% of 1HFY12 core earnings; StarHub to pay S$0.05/share in the last quarter, making a total of S$0.20 for the year.

OVERWEIGHT on telcos, M1 is top pick. 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.

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