TELCOs – OCBC
Expects steady growth in 2015
- Stable FY15 outlook
- Rising interest rate threat
- Yields should remain fairly attractive
Stable outlook for 2015
For FY15, the three local telcos have guided for a relatively stable outlook. M1 is probably the most optimistic among them, as it is expecting moderate earnings growth (in single digit) and slightly lower capex of S$120m this year. On the other hand, StarHub eyes low single-digit revenue growth, but it has kept its EBITDA margin guidance at 32%; as this is lower than the 33.7% achieved in FY14, it could translate to a flat earnings growth. Singtel has kept its stable group revenue and EBITDA outlook unchanged.
Mobile market remains stable
On the main mobile market, we note that while there has been a pickup in net adds in subscribers as well as ARPUs in the post-paid space, mobile penetration continues to edge lower, suggesting that further growth in mobile revenue will have to be driven by increased data usage. The telcos are hopeful that the higher 4G speeds will trigger more data usage; but anecdotal evidence suggests that subscribers remain mindful of their data caps.
Some signs that broadband market is more rational
While telcos continue to expect the broadband market to remain competitive, we believe that there are signs that the competition is getting more rational; this as the ISPs are no longer using price to grab market share. Instead, more are starting to offer speed upgrades to entice customers to sign up with them. As the incremental cost of these speed upgrades are quite minimal, margins should also start to improve.
Interest rate threat looming
With telecom stocks being pitched as defensive stocks and “prized” for their stable and attractive dividend yields, the threat of higher interest rate is likely to be a concern. However, we believe that as long as local interest rates do not rise sharply, we do not expect the telcos to lose their appeal. Maintain NEUTRAL on the sector, with a preference for Singtel (HOLD, S$4.16).
M1 – OCBC
Better-than-expected 4Q14 showing
- FY14 NPAT beats forecast
- Keeps moderate earnings growth
- Fibre ARPUs likely bottoming
Better-than-expected 4Q14 showing
M1 Ltd reported its 4Q14 results last evening, where revenue jumped 24.3% YoY (also +38.4% QoQ) to S$346.4m, driven largely by the strong handset sales, as demand for the new Apple iPhone 6 and 6+ remained robust. However, net profit grew by a slower 9.8% YoY (down 0.1% QoQ) to S$44.5m, mainly due to higher operating expenses (acquisition cost rose 10.6% YoY, +18.7% QoQ) and higher taxes. Nevertheless, the better-than-expected set of results saw its FY14 revenue of S$1076.3m (+6.8%) exceed our estimate by 4.9% and net profit of S$175.8m (+9.7%) outpace our forecast by 6.2. M1 declared a final dividend of S$0.119/share, bringing its total payout this year to S$0.189/share, versus S$0.21 last year.
Keeps moderate earnings growth outlook
For FY15, management continues to believe that it can achieve moderate earnings growth (within the single-digit range), driven by the stronger data usage. M1 notes that smartphone users contributed 65% of total data traffic in 2014, up from 55% in 2013. The group also revealed that 66% of postpaid customers are on tiered data plans, where 22% exceeded their data bundles. M1 is also upbeat about its fixed services segment, where the take-up of higher speed fibre plans will be ARPU accretive in the residential segment; it believes it is also wellplaced to capture growth in the corporate segment with its product and service differentiation. And with its LTE-network upgrade almost done, M1 expects to spend around S$120m as capex, down from the S$139.6m spent in 2014.
Improving FV to S$3.66
Besides the better-than-expected 4Q14 numbers, we are also heartened by the recovery in the residential fibre ARPUs, suggesting that the extreme price competition is starting to become more rational; although the continued drop in prepaid subscribers is an area to watch. In line with the latest guidance, we revise our FY15 estimates up by 2-7%; our DCF-based fair value also improves from S$3.37 to S$3.66, mainly due to the drop in 10-year bond yields. Maintain HOLD.
M1 – OSK DMG
We maintain BUY on M1, with FV adjusted to SGD4.20 (WACC: 7%, terminal growth: 1.5%) from SGD4.30, a 16% upside. Its re-rating catalysts are: i) continued revenue market share gains, ii) stronger take-up of fiber plans and iii) better data monetisation efforts. The fair value accounting on the iPhone should see M1’s service EBITDA margin bucking the trend in 4Q14, a typically strong quarter for handset sales.
- An indirect ‘beneficiary’ of the iPhone. The overwhelming demand for the recently launched iPhone 6 (IP6) and tight supplies for the larger screen iPhone 6+ (IP6+) in Singapore suggests a likely shift in the Android dominated handset sales mix for 4Q14/1QFY15. This should indirectly benefit M1 as it books upfront revenue from iPhone contracts to partially offset the device subsidy (fair value accounting), which should result in a smaller EBITDA impact vs its larger peers. M1’s EBITDA margin as a percentage of service revenue grew 1-6 ppts q-o-q in 4Q12 and 4Q13 during the launch of the previous iPhone 5 (IP5) and iPhone 5s (IP5s) respectively.
- Firing the latest fiber salvo. M1 recently slashed the price of its 1Gbps fiber plan by 50% to SGD49.00/month, marginally undercutting a similar plan offered by MyRepublic. While there are concerns that the latest move could lead to further value destruction in the fixed broadband space via a fresh round of price competition, we view this as a tactical response to strengthen M1’s triple-play bundling proposition and an attempt to narrow the gap with its larger peers, which are aggressively locking-in customers on multiple services. Being the smallest of the Tier- 1 fiber service provider, M1 stands to gain somewhat from competition with no legacy broadband revenue to cannibalise. Its home-bundling proposition should be catalysed by the implementation of cross-carriage, which should allow pay-TV subscribers to access premium content.
- Data monetisation. We expect M1 to better monetise data going forward with the recent introduction of fresh 4G plans and higher data consumption, resulting in more customers exceeding their bundled data allowances. Subscribers on M1’s previous tiered plans will also likely be subjected to a 4G VAS surcharge after 31 December, providing some average revenue per user (ARPU) uplift.