Steady as they go – maintain OVERWEIGHT

Decent 3CY11 showing. All the three telcos – M1, SingTel and StarHub – put in pretty decent showing in their 3QCY results recently, mostly meeting our forecasts, and largely demonstrating the defensive nature of their businesses. StarHub declared a quarterly dividend of S$0.05/share, while SingTel declared an interim dividend of S$0.068/share.

Review of Singapore operations. For the post-paid mobile market, there was no change to status quo – SingTel continues to dominate with a ~46% share, followed by StarHub with ~28% and M1 ~26%. Overall, the post-paid subscriber base here grew by some 55k QoQ to 3967k in the quarter, with the bulk coming from SingTel (+40k) while smartphones continued to be the phone of choice. However, we note that all three telcos saw higher monthly churn; monthly ARPUs have also declined for both M1 and SingTel but rose marginally for StarHub. The broadband segment was quite mixed, with SingTel adding 2.1% more subscribers, while StarHub saw a 1.3% fall; M1 revealed that it added 16k fiber customers, but did not reveal its overall broadband numbers. Finally on Pay TV, SingTel gained more traction in the quarter, while StarHub saw a marginal dip in subscribers; but we believe that content will determine growth.

4QCY11 outlook remains stable. Going forward, all the three telcos expect their Singapore operations to remain stable or show modest growth, buoyed by continued customer additions and increasing mobile data usage. We expect the three telcos’ EBITDA margins to remain around current levels – 42% for M1, 42% for SingTel and 30% for StarHub. All three of them have also kept their capex guidances unchanged. And thanks to their strong cashflow-generative businesses, the telcos have largely kept their dividend payout guidance; M1 to pay at least 80% of underlying net profit; SingTel to pay 55-70% of underlying earnings – recent interim dividend was 62% of 1HFY12 core earnings; StarHub to pay S$0.05/share in the last quarter, making a total of S$0.20 for the year.

OVERWEIGHT on telcos, M1 is top pick. In light of the increased volatility in the market due to the unresolved uncertainties in Europe, the still floundering economic recovery in the US and potentially slowing economic growth in China, we continue to like the telcos’ defensive earnings and relatively attractive dividend yields. Maintain OVERWEIGHT. While we have BUY ratings on all three telcos, our preference is for M1 as we believe it has potentially the most to gain from the NBN in the coming two years.

No sweat for telcos as new law nears

While the proposed changes to the Telecommunications Act will give the Ministry of Information, Communications and the Arts (Mica) more teeth, analysts believe there is little chance of telcos being bitten hard if they are passed, for now.

The amendment bill, which passed its second reading in Parliament yesterday, will, among various things, give the minister the power to order the separation of a telco.

This attempts to check anti-competitive behaviour by a telco that might exploit its involvement in various points along the supply chain at the expense of its competitors.

Yaacob Ibrahim, Minister for Information, Communications and the Arts, told Parliament yesterday that a telco operator which controls the network infrastructure, while having a toe in the wholesale and retail services markets as well, may lack commercial incentive to open up the services to its competitors.

If this amendment is passed, the telco industry will be the first one in Singapore subject to the possibility of operational separation or more drastic structural separation.

The Next Generation National Broadband Network (NBN) set-up, for example, illustrates both kinds. OpenNet – which is rolling out the network infrastructure – is structurally separate from SingTel, one of OpenNet’s four shareholders. SingTel does not have effective control of OpenNet.

Further downstream, StarHub, on the other hand, has a wholly owned subsidiary called Nucleus Connect which buys infrastructure from OpenNet and sells it to retailers. Nucleus Connect is subject to the milder operational separation. It has separate branding and physical premises from StarHub, but the latter retains its shareholding in it.

While separation has been built into the very structure of the NBN so that new players are not deterred from entering the market, the amendment aims to ensure that the same is true for other areas of the industry.

The need to split up an incumbent telco, however, might depend on the existence of more new players, and some believe that such a day has not yet come.

‘It could be good that there’s increased competition. (But) the Singapore market is quite small. Even if you want more competition, at the recent auction of the additional bandwidth, you didn’t see people coming in other than the three incumbents,’ said Carey Wong, OCBC Investment Research analyst.

SingTel called the separation order power ‘unnecessary’ in its response to the proposal. In Australia, its subsidiary Optus is arguing for more regulation of its rival, Telstra. Australia is struggling with the mechanics of Telstra’s structural separation, as part of the rollout of its own NBN.

An analyst with a local house believes that the way the NBN is structured here precludes the possibility of a similar separation order being enacted, at least in that respect. ‘It’s more of a signal to the telcos,’ he told BT.

Dr Yaacob stressed that the government would not use the power of the separation order frivolously. ‘As far as possible, the bill provides clear conditions and limitations under which a separation order can even be considered,’ he said.

The amendments proposed will also raise the ceiling on the financial penalty that can be levied on a telco, from $1 million to 10 per cent of the company’s annual revenue for licensable services. For even the smallest telco, M1, this is a ceiling of almost $60 million, based on figures from its last financial year.

M1, in its response last year, said that the increase could cause market disruption. ‘A stiffer fine only serves to transfer investible resources to the government and . . . slow down technology/infrastruc- ture deployment by the operator to rectify its non-compliance,’ it said.

Last week, it was fined $300,000 for the disruption of its services earlier this year. The higher penalty ceiling would have applied to the code of practice that M1 had breached. The telco has decided to appeal against the ruling.

‘Notwithstanding the higher penalty ceiling, the actual quantum of penalty imposed by IDA will continue to be based on the facts and severity of each case,’ Dr Yaacob said.

The bill is now slated for its third reading in Parliament, before it can be passed into law.

No sweat for telcos as new law nears

While the proposed changes to the Telecommunications Act will give the Ministry of Information, Communications and the Arts (Mica) more teeth, analysts believe there is little chance of telcos being bitten hard if they are passed, for now.

The amendment bill, which passed its second reading in Parliament yesterday, will, among various things, give the minister the power to order the separation of a telco.

This attempts to check anti-competitive behaviour by a telco that might exploit its involvement in various points along the supply chain at the expense of its competitors.

Yaacob Ibrahim, Minister for Information, Communications and the Arts, told Parliament yesterday that a telco operator which controls the network infrastructure, while having a toe in the wholesale and retail services markets as well, may lack commercial incentive to open up the services to its competitors.

If this amendment is passed, the telco industry will be the first one in Singapore subject to the possibility of operational separation or more drastic structural separation.

The Next Generation National Broadband Network (NBN) set-up, for example, illustrates both kinds. OpenNet – which is rolling out the network infrastructure – is structurally separate from SingTel, one of OpenNet’s four shareholders. SingTel does not have effective control of OpenNet.

Further downstream, StarHub, on the other hand, has a wholly owned subsidiary called Nucleus Connect which buys infrastructure from OpenNet and sells it to retailers. Nucleus Connect is subject to the milder operational separation. It has separate branding and physical premises from StarHub, but the latter retains its shareholding in it.

While separation has been built into the very structure of the NBN so that new players are not deterred from entering the market, the amendment aims to ensure that the same is true for other areas of the industry.

The need to split up an incumbent telco, however, might depend on the existence of more new players, and some believe that such a day has not yet come.

‘It could be good that there’s increased competition. (But) the Singapore market is quite small. Even if you want more competition, at the recent auction of the additional bandwidth, you didn’t see people coming in other than the three incumbents,’ said Carey Wong, OCBC Investment Research analyst.

SingTel called the separation order power ‘unnecessary’ in its response to the proposal. In Australia, its subsidiary Optus is arguing for more regulation of its rival, Telstra. Australia is struggling with the mechanics of Telstra’s structural separation, as part of the rollout of its own NBN.

An analyst with a local house believes that the way the NBN is structured here precludes the possibility of a similar separation order being enacted, at least in that respect. ‘It’s more of a signal to the telcos,’ he told BT.

Dr Yaacob stressed that the government would not use the power of the separation order frivolously. ‘As far as possible, the bill provides clear conditions and limitations under which a separation order can even be considered,’ he said.

The amendments proposed will also raise the ceiling on the financial penalty that can be levied on a telco, from $1 million to 10 per cent of the company’s annual revenue for licensable services. For even the smallest telco, M1, this is a ceiling of almost $60 million, based on figures from its last financial year.

M1, in its response last year, said that the increase could cause market disruption. ‘A stiffer fine only serves to transfer investible resources to the government and . . . slow down technology/infrastruc- ture deployment by the operator to rectify its non-compliance,’ it said.

Last week, it was fined $300,000 for the disruption of its services earlier this year. The higher penalty ceiling would have applied to the code of practice that M1 had breached. The telco has decided to appeal against the ruling.

‘Notwithstanding the higher penalty ceiling, the actual quantum of penalty imposed by IDA will continue to be based on the facts and severity of each case,’ Dr Yaacob said.

The bill is now slated for its third reading in Parliament, before it can be passed into law.

Greater freedom for pay TV viewers from March 2012

MDA has put out guidelines that cap early termination charges

The battle for the pay television dollar will soon intensify with a new guideline that makes it easier for dissatisfied subscribers to vote with their feet.

The Media Development Authority (MDA) has put out guidelines that cap the early termination charges (ETCs) that viewers have to pay if they cut short a pay TV contract with an operator.

From March 1, 2012, operators may charge ETCs made up only of the unfulfilled value of the subscription contract less any avoidable costs. Avoidable costs are expenses that the operator does not have to incur as a result of the contract termination. This guideline applies to contracts that are at least three months long.

A cap of 24 months will also be placed on any pay TV subscription contract so that consumers are not unreasonably tied down.

While such consumer rights are already alluded to in the Media Market Conduct Code, MDA is now spelling them out for the operators in response to consumer complaints and increasing competition.

‘In recent years, MDA has received feedback from subscribers of pay TV services that they are unfairly disadvantaged by having to pay ETCs due to unilateral changes initiated by the pay TV retailers on the channel line-up or pricing of their subscription packages,’ MDA said.

Even as disgruntled viewers clamour for redress, pay TV incumbents will have to contend with upstart competitors. The Next Generation Nationwide Broadband Network (Next Gen NBN) could mean an influx of new entrants in the pay TV field.

The response from the three main operators – StarHub, SingTel, and M1 – has been divided along the lines of who stands to gain or lose from the new guidelines.

There are more than 857,000 subscribers today, the bulk of which belong to StarHub. M1 is the newest on the pay TV scene with its 1box service which is run on a broadband network. SingTel, with its mioTV service launched in 2007, is somewhere in between.

‘SingTel’s current ETC policy already takes into account the interests of customers. We believe that there is no market failure to warrant new guidelines,’ a SingTel spokesman said.

‘Whilst we will review the new ETC guidelines . . . we are concerned that the guidelines may result in limiting consumers’ choices and deprive them of the opportunity to obtain attractive premiums.’

While StarHub said that it would ‘consider the feasibility of any new recommendations’, it suggested that alternative ETC structures be allowed to co-exist with the one laid down by the MDA in its feedback to the agency. StarHub told BT that the percentage of customers opting for early termination is ‘very small’.

M1, on the other hand, has embraced the idea of subscribers having more freedom to switch operators. ‘This will ensure that customers will not be unduly restricted or hampered should they wish to switch or terminate a pay TV service,’ it told BT.

It suggested to MDA that it go one better and allow subscribers to switch to the Next Generation Interactive Multimedia, Applications, and Services (NIMS) platform without having to pay ETCs at all for a period of time.

The NIMS platform will give consumers access to pay TV content over a broadband network.

MDA has decided against the suggestion. ‘This is something best left to commercial considerations of the pay TV retailers,’ said Toh Kai Ling, MDA’s policy director.

Operators, however, will have to toe the new line come March, or risk being ‘taken to task accordingly’, MDA said.

Greater freedom for pay TV viewers from March 2012

MDA has put out guidelines that cap early termination charges

The battle for the pay television dollar will soon intensify with a new guideline that makes it easier for dissatisfied subscribers to vote with their feet.

The Media Development Authority (MDA) has put out guidelines that cap the early termination charges (ETCs) that viewers have to pay if they cut short a pay TV contract with an operator.

From March 1, 2012, operators may charge ETCs made up only of the unfulfilled value of the subscription contract less any avoidable costs. Avoidable costs are expenses that the operator does not have to incur as a result of the contract termination. This guideline applies to contracts that are at least three months long.

A cap of 24 months will also be placed on any pay TV subscription contract so that consumers are not unreasonably tied down.

While such consumer rights are already alluded to in the Media Market Conduct Code, MDA is now spelling them out for the operators in response to consumer complaints and increasing competition.

‘In recent years, MDA has received feedback from subscribers of pay TV services that they are unfairly disadvantaged by having to pay ETCs due to unilateral changes initiated by the pay TV retailers on the channel line-up or pricing of their subscription packages,’ MDA said.

Even as disgruntled viewers clamour for redress, pay TV incumbents will have to contend with upstart competitors. The Next Generation Nationwide Broadband Network (Next Gen NBN) could mean an influx of new entrants in the pay TV field.

The response from the three main operators – StarHub, SingTel, and M1 – has been divided along the lines of who stands to gain or lose from the new guidelines.

There are more than 857,000 subscribers today, the bulk of which belong to StarHub. M1 is the newest on the pay TV scene with its 1box service which is run on a broadband network. SingTel, with its mioTV service launched in 2007, is somewhere in between.

‘SingTel’s current ETC policy already takes into account the interests of customers. We believe that there is no market failure to warrant new guidelines,’ a SingTel spokesman said.

‘Whilst we will review the new ETC guidelines . . . we are concerned that the guidelines may result in limiting consumers’ choices and deprive them of the opportunity to obtain attractive premiums.’

While StarHub said that it would ‘consider the feasibility of any new recommendations’, it suggested that alternative ETC structures be allowed to co-exist with the one laid down by the MDA in its feedback to the agency. StarHub told BT that the percentage of customers opting for early termination is ‘very small’.

M1, on the other hand, has embraced the idea of subscribers having more freedom to switch operators. ‘This will ensure that customers will not be unduly restricted or hampered should they wish to switch or terminate a pay TV service,’ it told BT.

It suggested to MDA that it go one better and allow subscribers to switch to the Next Generation Interactive Multimedia, Applications, and Services (NIMS) platform without having to pay ETCs at all for a period of time.

The NIMS platform will give consumers access to pay TV content over a broadband network.

MDA has decided against the suggestion. ‘This is something best left to commercial considerations of the pay TV retailers,’ said Toh Kai Ling, MDA’s policy director.

Operators, however, will have to toe the new line come March, or risk being ‘taken to task accordingly’, MDA said.