Author: tfwee
StarHub – OCBC
Will there be a triple top?
– StarHub has been trading within a rising trend channel since Nov 06 but it seems to have paused over the last 2 months.
– StarHub appears to have formed a double top last week after it tested but failed to surpass its Jun 07 peak at S$3.24.
– The stock has since fallen back to sit just above the 50- and 100-day moving averages, as well as the lower band of the trend channel, suggesting downside from here looks limited.
– As the subsequent pullback was made on weak volume, coupled with the short-term stochastic indicator close to turning up inside the oversold region, we expect StarHub to rebound and retest the S$3.24 again.
– However, we do not expect the S$3.24 resistance to break due to the negative divergence that has formed on the MACD. Hence any rebound would be short-lived.
– Should the support level around the lower band of the trend channel fail to hold, StarHub could fall back to the 1st support level at S$2.75. Subsequent support set at S$2.54.
Note : In the original report by OCBC, we assume S$3.24 was wrongly stated as S$2.24 and we have corrected it accordingly for this post
TELCOs – CIMB
Growth surprises, capital management could be next
• 2QCY07 results marked the start of re-rating for Singapore telcos. Earnings for SingTel’s Singapore operations and M1 surprised on the upside while StarHub’s performance was within our expectations. The sector’s 9.5% yoy revenue growth, driven by double-digit increases in mobile (11.5% yoy) and Internet/data services (+14% yoy), was the quarter’s highlight.
• Topline drivers remain a robust domestic economy and immigration influx. A robust domestic economy has lifted mobile postpaid ARPU (+5.6% yoy) and penetration rates for household broadband (Jun 07: 71%, Jun 06: 56%). Meanwhile, an influx of immigrant labour on the back of Singapore’s transformation into a global city continued to drive mobile-subscription growth (+11.5% yoy), despite high penetration rates of 111%.
• Potential yield surprises. Consensus is expecting an average CY08 yield of 5.6%. We are going for 8.0%. We believe that topline-led cash-flow growth will set the stage for upside yield surprises over the next two years, particularly for StarHub and M1.
• Risks receding. The risk of cost pressure is declining on the back of healthy topline growth. The three telcos are indicating greater comfort with next-generation broadband network (NBN) risks from a year ago, following dialogues with the regulatory body, IDA. We also believe the IDA’s final decisions will be balanced between introducing greater innovation through competition and limiting the risk of destructive competition for SingTel and StarHub.
• Upgrading sector to Overweight from Neutral; SingTel our top pick on 3-6-month view; StarHub our preferred pick on 6-12-month view. We raise our target prices for SingTel (Outperform), StarHub (Outperform) and M1 (Neutral) as we roll forward our valuation to CY08. Our ratings on the three stocks remain unchanged. SingTel’s target price goes up to S$4.54 (from S$4.27), StarHub’s to S$3.64 (from S$3.50) and M1’s to S$2.40, all based on DCF valuations. Singapore’s telco sector is benefiting from strong consumption growth on the back of an immigration boom and robust domestic economy. Strong cash flow-generation sets the backdrop for attractive sector yields of 8%. SingTel is our top pick for nearterm outperformance, as it is most likely to benefit from fund flows seeking a safe haven together with high growth in regional markets. StarHub is our preferred pick for the medium term. As the leading quadruple-offering operator, StarHub arguably offers the best exposure to Singapore’s immigration boom, with a 10% yield on strong free cash flow. M1 is a pure defensive stock with prospective yields of 9.5%.
StarHub – CIMB
Time to shine
• Best exposure to immigration influx and rising wages. Singapore’s population boom (+4.4%yoy) on immigration influx and wage growth (+8%yoy) helped drive Singapore’s mobile and broadband penetration rates to 113% (+210bps mom) and 75% (270bps mom) respectively in July. We reiterate our view that StarHub offers the best exposure to Singapore’s telco services consumption growth story.
• Rejuvenated cable TV could surprise. StarHub has introduced compelling new content, setting the stage for cable TV to surprise over the next few quarters.
• Re-rating around the corner. StarHub was de-rated by the market in 1H07 on unjustifiable concerns surrounding mioTV and pricing pressure on broadband. Operating results in 2H07 should dispel these concerns, triggering a re-rating.
• Consensus dividend yield estimate too conservative. We reiterate our view that consensus is due to upgrade its 5.6% CY08 yield expectations towards our expectation of 10% yield.
• Maintaining Outperform, upgrading target price to S$3.64 as we roll forward our DCF valuation (WACC: 6.9%, terminal growth: 1%) to CY08 basis. StarHub is our preferred Singapore telco pick over the next 12 months. Key catalysts include earnings delivery and dividend payouts that beat consensus expectations.
SingTel – BT
Makes sense holding on to leader SingTel
LAST week, the three listed telcos had very good news. A report on Friday said Singapore’s foreign population crossed the one million mark. According to the Department of Statistics (DOS), foreigners coming here in unprecedented numbers have pushed Singapore’s population to 4.68 million as at June, a 4.4 per cent rise over the previous year.
The foreign population, which includes professionals, workers, students and their family members, was estimated to hit 1,005,500 in June this year – crossing the one million mark for the first time.
This is a 14.9 per cent rise over a year ago and represents the highest jump in at least seven years, according to DOS. The previous year’s increase was 9.7 per cent.
The number of Singaporeans and permanent residents here also grew, by 1.8 per cent – the same as the previous year.
More foreigners mean higher mobile phone sales and the telcos, especially giant Singapore Telecommunications, have been reaping the benefits.
SingTel already showed that in its first-quarter results ended June 30, where it reported higher-than-expected net profit of $927 million, up 10.4 per cent, bolstered by unprecedented double-digit growth at home as the resurgent economy led to more mobile phone sales and higher business demand.
Market on fire
A recent report by Merrill Lynch said SingTel is leading the pack in home-market penetration.
Describing the local mobile market as on fire, it said that despite the 111 per cent headline market penetration, the Singapore mobile market grew revenue at double-digit rates in Q2 2007 and third-ranked MobileOne’s success to date in mobile broadband points towards more sustained growth in the medium term.
As for SingTel, its revenue growth in Q2 2007 was the highest in the market – the first quarter it has achieved this in many years.
The US brokerage noted that SingTel’s mobile revenue growth was largely achieved without significant contribution from mobile broadband, considering that the telco’s mobile broadband was launched only in late May.
It was also a milestone in another respect for SingTel’s domestic business: its revenue growth outstripped its smaller rival StarHub’s for the first time.
Regaining market leadership
StarHub has been posting double-digit revenue growth for the last three years while M1 and SingTel had yo-yoed from low single-digits to negative growth over the same period.
‘Over the past year, SingTel has been much more aggressive, particularly in the mobile and broadband markets as it looked to regain market leadership from the surging StarHub,’ said Merrill Lynch.
While it is unlikely StarHub will not strike back, SingTel’s momentum, given its size, is probably going to be a formidable challenge to take on without a bruising price war.
The surging share price performance of SingTel recently, however, might make investors wonder if the stock has priced in all the good news.
Yesterday, SingTel closed at $4, up $1.60 from its 52-week low of $2.40.
For a long-term hold, though, SingTel will remain a good bet, given its track record of stable and sensible management, having shown restraint in not chasing after telco acquisitions and being committed to returning excess cash to shareholders.
SingTel – CIMB
Getting due credit
• Safe-haven exposure to high-growth markets. SingTel’s diversified earnings base, liquidity and exposure to the world’s fastest-growing mobile markets offer a unique investment proposition in an uncertain market environment.
• Cheaper, more liquid exposure to Telkomsel. Based on the current prices of Singtel’s other associates and our fair valuation of Singtel’s Singapore operations, Telkomsel is trading at an implied 12.5x CY08 P/E. This is at a 20% discount to the current 15.5x CY08 P/E for Telkomsel, based on PT Telkom’s current share price.
• Bharti has scope for upside surprises on robust subscriber adds. Bharti continued to gain the largest share of new subscribers and outpace industry growth in August. Bharti is firmly on track to meet consensus estimates at August’s netadds rate of 2.05m/month. Bharti’s net adds per month increases at an average 54k/month in the past year, setting the stage for upside surprises.
• Maintain Outperform with higher target price of S$4.27 (S$4.05 previously). Our sum-of-parts-valuation has been raised primarily on a higher target price for Bharti (based on consensus target price) and changes in currency assumptions. Our earnings have been raised by 1% for FY08-10 to reflect earnings upgrades for Bharti, based on consensus estimates. Key catalysts could continue to be increased market preference for reliable earnings growth tied to structural domestic consumption and liquid exposure to high-growth mobile markets. SingTel remains our top Singapore telco pick.