Category: M1
TELCOs – CIMB
Previewing 4Q12
StarHub’s FY12 earnings could surprise positively while that of M1 is likely to be in line. More importantly, we expect StarHub to raise its quarterly dividend from 5 Scts to 6 Scts given its multi-year low gearing and lower capex in FY13.
Both telcos should see 4Q12 net profit weaken qoq due to seasonally-higher subscriber acquisition costs but that of StarHub should only be a little lower due to better bulk discount of devices. No change to our estimates for M1 and StarHub and our Neutral stand on the sector as it lacks rerating catalysts. StarHub (Outperform) is our top pick given a higher dividend. We will preview SingTel separately.
Higher SAC in 4Q12
Key themes for the 4Q12 results are: 1) competition in 4Q12 was fairly rational and did not stray beyond the bounds of seasonality, based on our industry checks. However, the hotspot of competition remained fixed broadband, 2) EBITDA margins are expected to come under pressure owing to higher subscriber acquisition costs (SACs) in relation to festive promotions and the full impact of subsidies for the iPhone 5, and 3) revenue is estimated to be higher given data monetisation and seasonality.
4Q12 expectations for M1
We expect M1’s FY12 core net profit to be line with both our and consensus estimates. However, a big swing factor is the composition of iPhones vs. non-iPhone devices as accounting for the former is based on fair value and has little impact on quarterly earnings whereas the latter does. 4Q12 service revenue should have improved qoq due to revenue contribution from subs growth in 3Q and revision of data prices. M1 is expected to release results on 21 Jan.
StarHub could surprise positively
StarHub’s FY12 core net profit could surprise the market by 4% but come within our forecast. The telco hinted that its EBITDA margin could exceed its guidance of 30% due to lower SACs as it has secured better bulk pricing for handsets and other devices. More importantly, we expect StarHub to raise its quarterly dividends from 5 Scts to 6 Scts. The company will release its results on 7 Feb.
TELCOs – CIMB
Previewing 4Q12
StarHub’s FY12 earnings could surprise positively while that of M1 is likely to be in line. More importantly, we expect StarHub to raise its quarterly dividend from 5 Scts to 6 Scts given its multi-year low gearing and lower capex in FY13.
Both telcos should see 4Q12 net profit weaken qoq due to seasonally-higher subscriber acquisition costs but that of StarHub should only be a little lower due to better bulk discount of devices. No change to our estimates for M1 and StarHub and our Neutral stand on the sector as it lacks rerating catalysts. StarHub (Outperform) is our top pick given a higher dividend. We will preview SingTel separately.
Higher SAC in 4Q12
Key themes for the 4Q12 results are: 1) competition in 4Q12 was fairly rational and did not stray beyond the bounds of seasonality, based on our industry checks. However, the hotspot of competition remained fixed broadband, 2) EBITDA margins are expected to come under pressure owing to higher subscriber acquisition costs (SACs) in relation to festive promotions and the full impact of subsidies for the iPhone 5, and 3) revenue is estimated to be higher given data monetisation and seasonality.
4Q12 expectations for M1
We expect M1’s FY12 core net profit to be line with both our and consensus estimates. However, a big swing factor is the composition of iPhones vs. non-iPhone devices as accounting for the former is based on fair value and has little impact on quarterly earnings whereas the latter does. 4Q12 service revenue should have improved qoq due to revenue contribution from subs growth in 3Q and revision of data prices. M1 is expected to release results on 21 Jan.
StarHub could surprise positively
StarHub’s FY12 core net profit could surprise the market by 4% but come within our forecast. The telco hinted that its EBITDA margin could exceed its guidance of 30% due to lower SACs as it has secured better bulk pricing for handsets and other devices. More importantly, we expect StarHub to raise its quarterly dividends from 5 Scts to 6 Scts. The company will release its results on 7 Feb.
TELCOs – Kim Eng
Focus On Dividends Still
Underweight. We are underweight on the telco sector mainly because of our Sell call on SingTel, which is being challenged on many fronts, both domestic and overseas. It is into its fourth year of declining earnings and if this continues, radical action may be called for at the management level. This year, all the telcos will be focusing on how to monetise data use, but we expect the benefit flow to be gradual. Subscriber churn in Pay TV is also likely to rise, mainly from StarHub, as SingTel beefs up content but we think this will be temporary. Earnings growth for the sector will be plodding at best. As such, we see the telco sector as still a sector to tap for dividends, and StarHub offers the best bet for sustainable dividends, especially if raises its 2013 annual DPS on record low net debt/EBITDA.
LTE/4G to see faster adoption than 3G. It took three years for 3G mobile subscriptions to exceed 2G as (1) 3G handsets were very limited in the early days, (2) were significantly more expensive than 2G handsets and (3) there was also very limited content positioned specifically for mobile screens, which are not suitable for desk top oriented content. There are now more 4G handsets available and it is very likely that users upgrading to new handsets will want them to be 4G capable. In addition, content customised for mobile handsets’ smaller screens is much more common now. As such, we would expect to see LTE adoption to be faster than 3G.
However, challenge is still in monetisation. Data monetisation will be the top priority in 2013. Despite surging data usage in the last few years on the back of the popularity of the iPhone and as more online content was made modified for small screens, past attempts to monetise this trend had been foiled by the universal availability of unlimited data plans. Now that the telcos have imposed much lower caps (from 12GB to 2GB) since 2H last year, the telcos now have a fighting chance to boost contributions from data. This will be aided by a greater diversity of LTE handsets, network coverage and price plans. However, given that less than 15% of mobile users exceeded 2GB monthly to begin with, the boost is likely to be gradual in 2013.
SingTel to be more aggressive in Pay TV. Last year, SingTel added 40 Fox International channels including popular channels such as National Geographic, StarWorld and Fox Movies. It also renewed the next three seasons of the Barclay’s Premier League ahead of StarHub on a non-exclusive basis. This year, we expect SingTel to be aggressive again in adding content as it continues to build up its channel line-up to match StarHub. StarHub still holds an edge in the depth of its content offerings especially in niche demographics but SingTel has a superior sports lineup.
Spectrum auction sooner rather than later. IDA, Singapore’s telco regulator, is expected to hold an auction in 2013 to refarm existing 1800 MHz, 2.3GHz and 2.5GHz spectrum bands from their current 3G use to 4G. The auction is designed to ensure service continuity beyond 2015 and 2017 when existing rights expire. As IDA is typically prudent in its long-range planning, we would not be surprised if the auction is held before mid-2013. The outcome is likely to be benign as sufficient spectrum is available and rationality should prevail amongst the telcos. While no reserve price has been set yet, we do not expect it to be significantly higher than the last round in 2010.
Underweight. We are underweight on the telco sector mainly because of our Sell call on SingTel, which is being challenged on many fronts, both domestic and overseas. In Singapore, margin downside is the biggest challenge as SingTel continues to compete on content even as it restructures away from a pure telco toward a multimedia strategy. In Australia, competitive pressures could start to simmer again given recent new capital received by smallest telco VHA, while India continues to be a nightmare of regulatory risks. SingTel is into its fourth year of declining earnings and if this continues, radical action may be called for at the management level.
TELCOs – Kim Eng
Focus On Dividends Still
Underweight. We are underweight on the telco sector mainly because of our Sell call on SingTel, which is being challenged on many fronts, both domestic and overseas. It is into its fourth year of declining earnings and if this continues, radical action may be called for at the management level. This year, all the telcos will be focusing on how to monetise data use, but we expect the benefit flow to be gradual. Subscriber churn in Pay TV is also likely to rise, mainly from StarHub, as SingTel beefs up content but we think this will be temporary. Earnings growth for the sector will be plodding at best. As such, we see the telco sector as still a sector to tap for dividends, and StarHub offers the best bet for sustainable dividends, especially if raises its 2013 annual DPS on record low net debt/EBITDA.
LTE/4G to see faster adoption than 3G. It took three years for 3G mobile subscriptions to exceed 2G as (1) 3G handsets were very limited in the early days, (2) were significantly more expensive than 2G handsets and (3) there was also very limited content positioned specifically for mobile screens, which are not suitable for desk top oriented content. There are now more 4G handsets available and it is very likely that users upgrading to new handsets will want them to be 4G capable. In addition, content customised for mobile handsets’ smaller screens is much more common now. As such, we would expect to see LTE adoption to be faster than 3G.
However, challenge is still in monetisation. Data monetisation will be the top priority in 2013. Despite surging data usage in the last few years on the back of the popularity of the iPhone and as more online content was made modified for small screens, past attempts to monetise this trend had been foiled by the universal availability of unlimited data plans. Now that the telcos have imposed much lower caps (from 12GB to 2GB) since 2H last year, the telcos now have a fighting chance to boost contributions from data. This will be aided by a greater diversity of LTE handsets, network coverage and price plans. However, given that less than 15% of mobile users exceeded 2GB monthly to begin with, the boost is likely to be gradual in 2013.
SingTel to be more aggressive in Pay TV. Last year, SingTel added 40 Fox International channels including popular channels such as National Geographic, StarWorld and Fox Movies. It also renewed the next three seasons of the Barclay’s Premier League ahead of StarHub on a non-exclusive basis. This year, we expect SingTel to be aggressive again in adding content as it continues to build up its channel line-up to match StarHub. StarHub still holds an edge in the depth of its content offerings especially in niche demographics but SingTel has a superior sports lineup.
Spectrum auction sooner rather than later. IDA, Singapore’s telco regulator, is expected to hold an auction in 2013 to refarm existing 1800 MHz, 2.3GHz and 2.5GHz spectrum bands from their current 3G use to 4G. The auction is designed to ensure service continuity beyond 2015 and 2017 when existing rights expire. As IDA is typically prudent in its long-range planning, we would not be surprised if the auction is held before mid-2013. The outcome is likely to be benign as sufficient spectrum is available and rationality should prevail amongst the telcos. While no reserve price has been set yet, we do not expect it to be significantly higher than the last round in 2010.
Underweight. We are underweight on the telco sector mainly because of our Sell call on SingTel, which is being challenged on many fronts, both domestic and overseas. In Singapore, margin downside is the biggest challenge as SingTel continues to compete on content even as it restructures away from a pure telco toward a multimedia strategy. In Australia, competitive pressures could start to simmer again given recent new capital received by smallest telco VHA, while India continues to be a nightmare of regulatory risks. SingTel is into its fourth year of declining earnings and if this continues, radical action may be called for at the management level.
TELCOs – DBSV
Three keys:4G, NBN & Spectrum
- No premium pricing for 4G, but lower data caps will drive moderate growth; Extra 1GB costs S$5-6 now (free before) Expect market shares to change in corporate data market as StarHub spends capex on top of Broadband Network (NBN) to extend its reach
- Spectrum sale could be a burden especially for smaller telcos with higher gearing
- Top pick: StarHub for higher dividend yield, superior growth and lower gearing than peers
Lower data caps to drive growth M1’s attempt to charge an extra S$10 for 4G service did not succeed as SingTel did not respond in kind. How can a Telco charge a premium when real 4G speeds are limited to few spots? We understand 4G speeds drop sharply as a user moves away from 4G base stations. However, Telcos are using 4G as an excuse to lower data-caps, which should benefit ARPU moderately. Currently, heavy data users (~10% of the total) have to pay S$5-6 to enjoy an extra 1GB or S$20 for additional 2GB bundled with more voice minutes and SMS.
StarHub may gain market share in corporate data space. SingTel leads in the corporate data market with ~ 80% share of a market that is worth over S$1.5bn. StarHub has less than 20% share as it did not have cables that reach commercial buildings. Progress has been slow on this front as NBN provides access to the buildings but not the individual floors due to operational issues. However, it is ready to spend some capex to wire up the buildings now. Recently, StarHub also started to offer data-mining services to small & medium size enterprises to strengthen its business relationships.
Telcos may have to spend S$80m-S$100m in spectrum auction in 2013. The regulator is expected to re-farm and auction the 1800MHz, 2.3GHz and 2.5GHz spectrum bands in 1H13. The cost is significant for smaller players with higher gearing.
BUY StarHub for 5.8% yield. StarHub’s net debt to EBITDA stands at 0.5x compared to 1.0x for peers. This implies it can afford to pay additional S$350m dividends (21 Scts DPS or 5.5% yield) to reach 1.0x net debt to EBITDA. With spectrum sale due in 1H13, it is even more important to have lower gearing.