Month: September 2012
TELCOs – OCBC
IPHONE 5 TO HELP DRIVE LTE
- iPhone 5 to help LTE adoption
- LTE still likely 2013 story at best
- Defensive earnings, attractive yields
Launch of new iPhone 5
Apple has unveiled the latest reiteration of the hotly popular iPhone, which will be available in Singapore from 21 Sep. Besides sporting a slightly larger screen and better resolution, faster processor, improved battery life, the iPhone 5 is 4G LTE-enabled and will work on the 4G (1800MHz) networks being implemented here.
Demand likely strong
As with the previous versions of the iPhone, we expect the demand for the new iPhone 5 to be pretty strong, especially from people still holding the iPhone 4, which is becoming pretty long in the tooth. We also believe that most iPhone 4 subscribers are eligible for a subsidized upgrade, as the 2-year lock-up period should be over by now.
Should help drive LTE adoption
While the strong demand could see near-term pressure on the telcos’ EBITDA margins due to the higher subsidies for the new iPhone (as compared to Android phones), we also expect the smartphone’s popularity to help drive LTE adoption over the medium to longer term. We had earlier identified the lack of LTE-enabled handsets to be a stumbling block to the adoption of LTE.
Gradual recovery in margins
However, with both M1 and StarHub recently announcing their new mobile plans with tiered data pricing, new and re-contracting subscribers will get greatly reduced free data bundles (starting from 2gig compared to 12gig previously). Because of this, we could see subscribers initially reining in their data usage, thus resulting in minimal – if any – ARPU uplift for the telcos. However, we think that this is just a temporary setback, and should see data usage continuing to increase, thus resulting in a gradual recovery in margins.
LTE is still 2013 story at best
While we expect the iPhone 5 to help subscribers make the jump from 3G to 4G LTE, we still opine that LTE is still a 2013 story at best. Nevertheless, we continue to like the overall telco sector for its defensive earnings and attractive dividend yields (backed by strong operating cashflows). Maintain OVERWEIGHT.
TELCOs – DBSV
4G pricing is an ultimate cure
- M1 & StarHub to price 4G services significantly higher than 3G. Players with bigger exposure to the mobile sector will benefit more
- Even if we ignore the impact of lower data-caps StarHub’s FY13F/14F earnings could benefit 4%/8%, marginal impact for SingTel.
- Raise StarHub’s TP to S$3.67 assuming DPS of 22 Scts in FY13F, implying 6% yield. HOLD SingTel for 5% yield, intense competition in India, Australia and startup cost for mobile advertising as key concerns
4G pricing to correct 3G’s too generous data pricing in Singapore. In June, SingTel lowered the data-caps to 2GB from 12GB. During the 3G era, c.22% of M1’s users exceeded the 2GB limit without paying an extra cent. With higher 4G speeds (five times higher than 3G), more users are likely to exceed the 2GB data-cap to end up paying S$5.35 per extra GB. In addition, SingTel will charge S$10.70 per GB for exceeding the data-cap from Jan 2013 onwards. M1 took it one step further in September and announced that it will charge an additional S$10.70 in subscription fees for 4G versus its 3G ARPU of S$53. StarHub has also put in place higher 4G pricing of an additional S$10.70 for 4G plans from March 31, 2013 onwards when its 4G coverage will be significantly higher. StarHub will charge slightly higher S$6.42 per GB for exceeding the datacap. An additional S$10 per month works out to be 19% of M1’s, 14% of StarHub’s and 12% of SingTel’s reported postpaid ARPUs.
4G penetration of 8% in 2013F, 20% in 2014F. These projections are based on experience in countries like the US where 4G penetration reached around 9% after 18 months of launch, while in Korea, penetration hit 17% after 13 months of launch. 4G network coverage and handset availability are the two most important factors. However, 4G is not priced at a premium in the above countries, hence 4G adoption could be slightly slower in Singapore despite the widespread 4G network.
Robust longer-term outlook for the sector. We raise StarHub FY13F DPS to 22 Scts versus our expectations of 21 Scts earlier on better longer-term outlook and a very low FY12F net debt to EBITDA ratio of only 0.5x. In our DDM model, we assume 8% cost of equity, 2% long-term growth rate and 22 Scts DPS. However, upside for StarHub is limited as 22 Scts DPS is already reflected in the share price.
STEng – Kim Eng
When the Tough Keep On Rollin’
A shield against global worries. Recent contract wins have helped cement our view that STE remains one of the top defensive picks for investors concerned about global macro uncertainties. STE’s strong orderbook, helped in no small way by its defence contract capabilities, provides earnings visibility and supports an attractive forward dividend yield of 5-5.5% p.a. Our BUY call has worked out quite well since our upgrade in April, with a ~10% total return on investment. With a target price of SGD3.78 pegged to mid-cycle valuations of 19x FY2013 PER and the best yet to come, we maintain our BUY call.
FY2012 in the bag; FY2013 looking good. SGD179m in contracts recently announced by ST Marine reaffirms strong contract win momentum despite the tough economic conditions. This brings its total orderbook closer to SGD13b, of which ~SGD2.5b (40% of our FY2012 revenue forecast) is expected be booked in 2H2012. With 1H2012 revenue of SGD3.1b (50% of FY2012 forecast), we believe our FY2012 revenue forecasts are in the bag. As we expect the strong momentum to continue, FY2013 is also looking good.
Conservative margin assumption suggests upside to earnings. We have assumed a 9% net margin for our FY12-14 forecasts, but there may be upside potential as these are conservative assumptions that mirror operating conditions immediately after the Great Financial Crisis of 2008-09. STE’s earnings resilience comes from diverse businesses that help shield it from sector-specific shocks. Historically, they have given earnings a complementary mix of stability and profitability.
The cycle is still on STE’s side. We believe Aerospace and Marine still have upside in their respective cycles, as the aviation MRO industry is expected to benefit from the proliferation of airline capacity, and high oil prices are keeping activities in the offshore sector positive. For Electronics, government initiatives to enhance the local rail transport network are improving contract win visibility, while Kinetics will continue to be underpinned by steady defence-based contracts.
M1 – Kim Eng
Singing the 4G Tune
No big splash from 4G. Come 15 Sept, M1 will be the second telco in Singapore to launch 4G plans after SingTel. Its prices and data caps are closely in line with SingTel’s and we do not expect a price war to erupt. While ARPU should be boosted as they are priced at a premium to existing 3G plans, the impact on earnings is at best 10%, by our estimates. Maintain HOLD. However, M1 is our top telco pick for its attractive dividend yield of 5.7%, the highest in Singapore currently.
4G plans launched. M1 has launched four 4G plans for smartphones and three for mobile broadband devices, the second telco to do so after SingTel. Immediately, three things are notable. First, the 4G plans are priced at a premium to its 3G plans. Second, it has reduced its data bundles from 12GB to mirror that of SingTel’s (2GB, 3GB, 5GB). Third, as expected, M1 has removed its top-end unlimited plan and replaced it
with a lower cap 12GB data plan.
Should not rock the boat. M1’s 4G plans are rational as they are actually priced at a premium to SingTel’s 4G plans. As such, we do not expect net-adds to spike. However, the additional 1GB data allowance to be given for recontracting customers (worth SGD10.70) should equalise the price difference between the two telcos, hence it should minimise the churn and maintain its existing subscriber base. Over time however, the premium to 3G should boost its ARPUs.
Potentially 10% earnings upside. According to M1, 80% of its smartphone users uses less than 2GB of data a month, and less than 10% uses more than 5GB a month. Similarly, 80-90% of SingTel and StarHub’s users consume an average of only 1GB a month. As a result, they should be able to tap on 10-20% of their subscriber base to monetise the lower data caps. Depending on the actual usage, we estimate up to 9.6% upside to FY13 earnings in the best case scenario.
Maintain HOLD. We maintain HOLD on M1 with a target price of SGD2.65 based on peer average PE of 14x earnings as we roll forward to 2013. However, the stock is attractive on its dividend yield of 5.7%, still 430 basis points ahead of the 10-year Singapore Government Bond, and is our top Singapore telco pick.
M1 – Kim Eng
Singing the 4G Tune
No big splash from 4G. Come 15 Sept, M1 will be the second telco in Singapore to launch 4G plans after SingTel. Its prices and data caps are closely in line with SingTel’s and we do not expect a price war to erupt. While ARPU should be boosted as they are priced at a premium to existing 3G plans, the impact on earnings is at best 10%, by our estimates. Maintain HOLD. However, M1 is our top telco pick for its attractive dividend yield of 5.7%, the highest in Singapore currently.
4G plans launched. M1 has launched four 4G plans for smartphones and three for mobile broadband devices, the second telco to do so after SingTel. Immediately, three things are notable. First, the 4G plans are priced at a premium to its 3G plans. Second, it has reduced its data bundles from 12GB to mirror that of SingTel’s (2GB, 3GB, 5GB). Third, as expected, M1 has removed its top-end unlimited plan and replaced it
with a lower cap 12GB data plan.
Should not rock the boat. M1’s 4G plans are rational as they are actually priced at a premium to SingTel’s 4G plans. As such, we do not expect net-adds to spike. However, the additional 1GB data allowance to be given for recontracting customers (worth SGD10.70) should equalise the price difference between the two telcos, hence it should minimise the churn and maintain its existing subscriber base. Over time however, the premium to 3G should boost its ARPUs.
Potentially 10% earnings upside. According to M1, 80% of its smartphone users uses less than 2GB of data a month, and less than 10% uses more than 5GB a month. Similarly, 80-90% of SingTel and StarHub’s users consume an average of only 1GB a month. As a result, they should be able to tap on 10-20% of their subscriber base to monetise the lower data caps. Depending on the actual usage, we estimate up to 9.6% upside to FY13 earnings in the best case scenario.
Maintain HOLD. We maintain HOLD on M1 with a target price of SGD2.65 based on peer average PE of 14x earnings as we roll forward to 2013. However, the stock is attractive on its dividend yield of 5.7%, still 430 basis points ahead of the 10-year Singapore Government Bond, and is our top Singapore telco pick.