Category: M1
TELCOs – Phillip
Results Season Takeaways
Sector Overview
The Telecommunications Sector under our coverage consists of SingTel, Starhub & M1. Starhub (STH) and M1 are pure plays to the Singapore market, while SingTel (ST) has exposure to the Asia-Pacific region through its regional mobile associates.
- Revenue remains stable q-q
- Telcos remain attractive due to high dividend yield
- Neutral on Starhub, SingTel, and M1. We prefer Starhub over SingTel and M1
Mobile
- Q-Q post-paid net adds similar across three Telcos
- Post-paid ARPU mostly flat q-q, Starhub marginally lower
- Data monetization key revenue growth driver
Pay TV
- SingTel continues to gain market share
- Revenue to remain stable and strong
- Cost of non-exclusive contents, previously signed on exclusive basis, unlikely to decrease significantly
Broadband
- Fibre broadband continues to grow rapidly
- SingTel continues to dominate, with market share higher than those in the post-paid mobile segment
Others
- Sep – Dec 2012 may see an increase in equipment revenue and cost, due to the launch of popular iPhone 5
- 320 MHz of spectrum may be up for auction in 2013
Recommendation
We are neutral on the sector, while maintaining that they remain attractive due to their high dividend yield and stable earnings. We prefer Starhub and SingTel over M1 due to their bundled packages, which include Pay TV, being better able to retain customer loyalty. With both having higher operating revenue than M1, while Capital expenditure as a ratio of Total Operating Revenue is similar across all three Telcos, Starhub and SingTel have a higher budget to spend on future enhancements.
We prefer Starhub to SingTel due to its single geographical exposure, compared to the multiple countries that SingTel has a stake in. Starhub is therefore less volatile. Starhub also creates shareholder value, while paying out a higher dividend yield based on current price. Based on current share price, we are Neutral on Starhub, SingTel and M1.
TELCOs – CIMB
3Q12 results round-up
Telcos’ 3Q12 results were a mixed bag. StarHub surprised on the upside due to lower traffic costs while SingTel disappointed. The main notables were 1) the deceleration of mobile revenues, 2) acceleration of fibre broadband net adds, and 3) rise in pay TV competition.
We remain Neutral on the sector as we see no major rerating catalysts. StarHub (Outperform) is still our top sector pick as it offers the highest dividend yield among Singapore telcos and upside potential to its dividends due to its strong FCFE and robust balance sheet.
Mixed results
SingTel’s 3Q12 results missed expectations because of the drag from Bharti which overshadowed the anticipated strong showing in Singapore. Overall, SingTel continued to gain market share in all segments: mobile, fixed broadband, and pay TV. StarHub’s 3Q trumped expectations with the help of lower traffic costs but M1’s results undershot due to unexpectedly high subscriber acquisition costs (SAC).
Mobile revenues dipped
Industry mobile revenue growth slowed to 1.1% yoy from 1.5% in 2Q12 and 4.2% in 1Q12. The slowdown came from lower roaming revenue due to less inbound and outbound roaming. M1’s and SingTel’s mobile revenues rose qoq (seasonality) but StarHub (-1.4% qoq) disappointed as it had lowered roaming rates with the Vodafone group. SingTel is still gaining market share, thanks to its aggressive bundling of mobile broadband with fixed broadband. Its revenue share rose 0.5% pts to 51.7% at the expense of StarHub whose share fell 0.5% pts to 32.2%.
Fibre accelerated
3Q fixed broadband revenue accelerated to 8% yoy because of an 11% jump in SingTel’s 3Q revenue. SingTel captured 59% of new subscribers in 3Q, similar to 60% in 2Q. The telco now has 58% fibre broadband market share.
Pay TV race heats up
SingTel’s mioTV notched up 4.7% qoq growth in revenue and raised its market share by 2% pts to 24%, driven by a combination of higher ARPU and subscribers. With a new line-up of >130 channels, SingTel has substantially narrowed the gap with StarHub’s 157 channels, eroding the latter’s differentiation and dominance.
TELCOs – OCBC
3QCY12 REVIEW – STILL OVERWEIGHT
- 1 hit, 2 near-misses
- Defensive story intact
- Yield compression also likely
StarHub again above forecast
Out of the three telcos, StarHub again posted 3Q12 results that were above our forecast, aided by a stronger-than-expected margin recovery (mainly coming from lower traffic expenses). M1 and SingTel both posted results that were slightly below our estimates, with the former citing continued upfront smartphone subsidy expensing for the shortfall, and the latter hit by weaker Optus performance and also a slide in regional currencies against the SGD.
Review of Singapore mobile operations
On the core post-paid mobile market, SingTel continues to dominate with ~48% share, then StarHub with ~28% and M1 ~26%. But we note that post-paid subscriber base grew 55k QoQ to 4180k, even though the market already has a penetration rate of nearly 150%, with some 70% of post-paid subscribers using smartphones. Monthly ARPUs are relatively stable; but could see increases once LTE (or 4G) takes off from 1Q13, aided by the introduction of more LTE-enabled phones and also tiered pricing plans with less generous data bundles.
Biggest surprise from SingTel
Both M1 and StarHub are still guiding for relatively stable outlook for 2012, albeit with potential erosion in service EBITDA margins. However, SingTel surprised by guiding for consolidated group revenue to see a low single-digit (versus single-digit growth previously), mainly dragged down by continued weakness in Australia. However, we think that all the three telcos should continue to generate very positive operating cashflows and this should keep their healthy dividend payouts intact.
Maintain OVERWEIGHT
While the three telcos have performed reasonably well this year, led by StarHub, we continue to like their defensive business against the still-uncertain economic backdrop. Further yield compression could also be another price catalyst over the next 12 months. Hence we maintain our OVERWEIGHT rating and keep M1 as our top pick.
M1 – DMG
Still noises on the line
The acute margin pressure persisted in the Sept quarter as expected due to the full quarter impact of the Android handsets, where fair value accounting is not observed. While 9M cumulative numbers were still behind the curve, M1 expects revenue and earnings to improve in 4QFY12. We have retained our forecast, fair value and recommendation, noting that forecast risk remains. NEUTRAL.
Calling for a better 4Q. M1's 9MFY12 results made up 66% and 68% of our and consensus estimates respectively (62%-65% of the street/our revenue forecast). Teh shortfall was mainly attributed to a further 3%-pt erosion in the EBITDA margin q-o-q, no thanks to the full-quarter impact of the accounting treatment for Android handsets (differs from fair value accounting applied for the iPhone where some revenue is recognized upfront to offset the subsidy). We are keeping our forecast – in line with the renewed guidance at its result call of a better final quarter- with the benefit of stronger revenue traction (Android revenue progressively recognized and fair value accounting for the iPhone 5). While management is guiding for improved earnings, it also stated that subscriber acquisition cost (SAC) is expected to rise due to the introduction of the Phone 5. This would imply much stronger revenue growth momentum.
Weak roaming revenue. M1 said it was affected by the seasonally weaker roaming traffic for the quarter and the lower Malaysia–Singapore roaming tariffs implemented last year. It had previously expected traffic to be stimulated by the lower rates (lowered by 20% for voice) but this has yet to materialize. We gather from the management that the split between inbound and outbound traffic has been fairly even.
Some improvement for NGN provisioning. M1 added 7k fiber broadband customers to 44k in 2QFY12. While it saw an improvement in the service-provisioning timeline for residential customers, M1 said this was still longer than the three days stipulated by the IDA. For commercial premises, the provisioning timeline is still below the threshold conveyed and it is working closely with all stakeholders to reduce the waiting time.
Seeing good LTE take-up – 43k subs on 4G in a matter of weeks. M1 is not able to monetize the premium charged for 4G usage (incremental SGD10/mth over 3G plans) due to the promotional waiver on access. Management said it is seeing a good shift from big screen usage to smartphones.
Capex and BPL. M1 is guiding for capex to remain at the SGD120m level until FY14, after which it would be replaced by maintenance capex. On the Barclays Premiership League (BPL) rights awarded non-exclusively to Singtel earlier, management reiterated its previous stance in not vying for premium content.
M1 – Phillip
Below expectations
Company Overview
M1 is the 3rd largest Telecommunications company in Singapore. The introduction of NGNBN in Singapore lowered entry barriers to the Fixed Line business, which would allow M1 to venture into the corporate and retail
broadband market.
- 6.0% Q-Q decline in Net profits on higher operating expenses, including higher cost of handset.
- 2.9% q-q increase in service revenue positive.
- Nationwide LTE coverage, higher iPhone 5 subsidies likely to increase post-paid customer base.
- Upgrade to Neutral, with new TP of S$2.41.
What is the news?
M1 reported 6.0% q-q decline in Net profits due largely to higher operating expenses, including higher cost of handset. Service revenue was however positive, with increases in revenue contribution from all three major categories.
How do we view this?
Although net profits were low, and EBITDA margins declined for the 5th consecutive quarter since 2Q11, we are upbeat on the improvement in service revenue, while noting that handset subsidies will be recovered in future quarters. We think that the nationwide LTE coverage and the higher iPhone 5 subsidies given by M1 compared to its peers would further increase its post-paid customer base. We see potential for fibre to significantly contribute to M1’s net profit, although this may take time as current profit margins are likely lower than its more established peers.
Investment Actions?
We adjust our figures to reflect 3Q12 earnings. With the current uncertainty in the macro economic environment, and as the search for positive real returns continue, M1’s dividend yield of 5.5% remains attractive at current prices. Fundamentally, M1’s service revenue growth continues to be healthy, while we do not expect any potential headwinds, other than a possible spectrum auction bidding war, for which M1 has the ability to compete in, possibly through an increase in borrowings from banks. We therefore upgrade our rating to “Neutral”, with a new TP of S$2.41.