TELCOs – Maybank Kim Eng

All in; SingTel raised to BUY

  • Raise sector weighting to OVERWEIGHT as we upgrade SingTel to BUY. M1 remains our preferred BUY, followed by SingTel.
  • M1 will enjoy stronger EPS CAGR of 8.5% over FY14E-16E, while SingTel is on the cusp of an earnings recovery of 5% EPS CAGR after three consecutive years of earnings decline.
  • Growth pillars: Data monetisation and falling handset subsidies, with data roaming rebound a bonus.


Upgrade SingTel to BUY, sector to OVERWEIGHT

We upgrade SingTel to BUY with a SOTP-based TP of SGD4.35. We are now BUYers of all the three telcos, prompting us to raise the sector to OVERWEIGHT. In terms of preference, M1 remains our top choice, followed by SingTel which displaces StarHub to the third position. Despite challenges on the Pay TV and home broadband front, StarHub remains a BUY. We believe SingTel’s YTD under-performance and current low market expectations provide room for the stock to be re-rated ahead of StarHub.

Alignment of positive trends

In our view, the building blocks are fast falling in place and were evident in 1Q14 results. Data monetisation accelerated in 1Q14, driving mobile revenue to record levels with growth rate at its fastest in more than four quarters. Tiered data plan users have also hit new highs of more than 50%, and we expect 70% by year-end. Fast-falling handset subsidies are another positive trend that would benefit margins. Lastly, data roaming has finally stabilized after six quarters of YoY decline. The upshot: Stronger earnings growth prospects for the industry.

Catalysts: (1) Data monetisation could take place faster than expected with emphasis on video content to drive data usage. Both SingTel and StarHub are developing more local content for their apps. (2) Data roaming could make a comeback on plans to make it easier to activate or even kick in automatically when users are overseas. (3) Low levels of gearing, especially for M1 and StarHub, and the absence of large capex requirements in the medium term suggest room for higher dividends ahead.

Risks: As the telcos expand the capabilities of their networks to handle newer services such as VoLTE (Voice over LTE) and the greater demand for video content, there could be network outages. Regulatory fines aside, the key risk lies in higher user churn owing to unstable networks. One risk particular to SingTel is an acquisition of Shin Corp as was rumoured a few months ago, which we would view cautiously if it materialises.


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