Nims no more

We are positively surprised by the regulators’ decision to drop plans for the development of a common set-top box (STB) for pay TV. This will be positive for the incumbents, especially StarHub, as it raises entry barriers. Newcomers will now have to provide a STB instead of using a common one.

We continue to advocate StarHub, for a potential increase in its dividends or capital repayment given its low net debt/EBITDA, providing re-rating catalysts.

What Happened

Singapore’s telecom and multimedia regulators have decided to drop their search for a standardised pay-TV set-top box, dubbed Project Nims (next generation interactive multimedia applications and services), as the bids would not have achieved the desired outcome. There were issues preventing some of the proposals from gaining traction, including technology and business constraints. It was supposed to be undertaken by NIMSCo to build, design and finance the project backed by grants from the government.

What We Think

This will be positive for the incumbents, we reckon, especially StarHub, since it would raise entry barriers for newcomers. Aspiring pay-TV operators would have to develop their STB rather than turn to a common one that would probably be supplied by OpenNet.

Nims initially was supposed to lower the barriers of entry and spur new players in the PayTV market while increasing content variety. With the cancellation of Nims, regulatory risk is now lower and the probability of higher dividends or capital management from StarHub has risen, in our view. The other risk cited by StarHub is global economic uncertainties.

What You Should Do

Stay invested in StarHub, our top telco pick. We like it for a potential increase in dividends or capital repayment, given its low net debt/EBITDA of 0.5x, the lowest among Singapore telcos and substantially below its target of 1.5-2x.

1QCY12 REVIEW – OVERWEIGHT

•Stable 2012 outlook,

•But margins pressure exists

•Defensive earnings, attractive yields

1QCY12 results were in line

All three telcos recently reported 1QCY12 results which were in line with our forecasts. M1 and SingTel earnings were either spot on or within 2% of our estimates. Although StarHub’s earnings were 13.2% above our forecast, we note that the boost came from higher NBN roll-out adoption grants and higher amortised income; but EBITDA margin of 32.2% was in line with our forecast.

Review of Singapore mobile operations

No change in status quo in the post-paid mobile market – SingTel dominated with a ~47% share, followed by StarHub ~28% and M1 ~26%. Overall, the post-paid subscriber base grew by 38k QoQ to 4067k, with the bulk coming from SingTel (+30k). However, the 0.9% growth was the slowest since Mar 09; and could continue to slow as users shift towards multi-SIM plans for their mobile devices from dongles. Data as a percentage of ARPU is hovering around 37-42%, up from around 35-40% in 1QCY11; this as non-voice communication continues to gain popularity among smartphone users.

Stable 2012 outlook

Going forward, all the three telcos expect their Singapore operations to remain stable or show modest growth, buoyed by the increasing mobile data usage and also the NBN roll-out which is nearing completion. However, EBITDA margin outlook continues to remain fairly muted; and any boost from LTE is not likely to materialize substantially in 2012. Nevertheless, thanks to their strong cashflow generative businesses, the telcos have kept their dividend payout guidance, thus keeping their yields attractive.

Maintain OVERWEIGHT

With the exception of StarHub (+11% YTD), the other two stocks have underperformed (M1 -1.6%, SingTel -0.6%) versus the STI’s 5.2% gain. But with markets likely to remain volatile, we believe that the telcos’ defensive earnings and attractive yields offer a safe harbour for the risk-adverse investors. Maintain OVERWEIGHT. Our pick in the sector is M1.

Review of 1Q12

1Q12 telco results reflected the usual seasonal weakness. Key features were: 1)subdued service revenue;2) muted sector margins;and 3)a rebound in ARPUs forfixed broadband.SingTel continued to gain market share in broadband and pay TV, at StarHub’s expense.

All three telcos’ results met our forecasts. Maintain Neutral on the sector as we see no major catalysts. StarHub (Outperform) is our top pick as its net debt/EBITDA is at a multi-year low, ripe for the payment of higher dividends.

SingTel continues to gain share

While its share of mobile revenue peaked in 4Q12, SingTel gained share in fixed broadband and pay TV. This reflects its strategy of garnering more customers with the view of selling them more services in future.

Gearing fell

Gearing improved for all three, with StarHub’s falling to 0.49x, the lowest since 2Q06. Although StarHub has acknowledged that its gearing is very low, it plans to maintain its dividend payout of 20cts in 2012 and does not intend to go for capital management. We believe StarHub is over-conservative and should loosen up its dividend purse strings

Service revenue dipped on seasonality

Overall performances were subdued because of seasonality. Industry revenue dipped 1.3% qoq (but rose 3.8% yoy), due to seasonality and lower equipment sales at StarHub and M1. SingTel’s and StarHub’s service revenue weakened qoq while M1’s grew slightly, thanks to subscriber growth.

Stable and muted guidance

SingTel expects revenue to grow by low single digits with margins to ease. Its capex guidance does not reflect the cost of 4G spectrum in Australia which will be auctioned at end-2012.

StarHub has kept to its 2012 guidance of low-single-digit revenue growth and flat EBITDA margins. To our disappointment, it has maintained its DPS, which we think should be raised.

M1 sounded more positive, expecting its momentum in 1Q to continue through the year, mainly led by mobile data and fixed services.