Category: M1
TELCOs – BT
StarHub seen gaining with portability
STARHUB has emerged as the top pick among Singapore telcos, as the telecom sector prepares for the new regime whereby customers will be able to switch mobile-phone operators while keeping their established phone number, says Cazenove & Co.
The research house is also bullish on MobileOne (M1), but recommended an ‘underperform’ on SingTel.
At a briefing yesterday, analyst Lai Voon San said he expects the new system, called mobile number portability (MNP), to dominate the telecom sector here, with many average consumers switching to StarHub given the bundled discount they can get from the latter’s strength in pay-TV.
‘We think that StarHub can grab an extra 10-15 per cent market share on top of what they already have now,’ he said. Customers will be offered incentives to have the same supplier for their mobile, pay-TV services and broadband telecommunications.
Mr Lai believes that SingTel is likely to be the biggest loser as it has the most post-paid subscribers at present. MNP is expected to be introduced here in May.
Mr Lai is similarly bearish on SingTel’s pay-TV service, saying: ‘No matter how much money they throw into it, it will be years before they make a return.’ He sees SingTel’s project as only driving up the price of content for consumers.
He said M1 stands out for its forecast dividend yield of 9.7 per cent this year – the highest in Cazenove’s telco universe. The firm’s earnings are relatively stable, Mr Lai said.
Looking ahead, he said that the next generation national broadband network (NGNBN) should gain further momentum through the year ‘as decisions are expected over who will build the network’.
While this could hurt incumbents SingTel and StarHub, the latter’s pay TV dominance will support its competitive outlook with SingTel again the most vulnerable.
‘We expect bundling to gain momentum as SingTel tries to compete against StarHub and offer more discounts,’ he added.
Cazenove sees the telecom sector in Asia-Pacific as a safe haven amidst the market volatility this year, and is expected to outperform the other sectors.
The major themes across the region include growth in wireless subscriber, regulatory changes and regional expansion of assets.
China is expected to add 110 million wireless subscribers, while Indonesia will see another 31 million new ones.
Mr Lai sees policy implementations and changes ahead for 2008, including additional licences in places like Thailand and Indonesia, MNP in Singapore and Malaysia, and 3G rollouts in China and Thailand.
In addition, Cazenove expects more company mergers and acquisitions (M&A) as telcos expand their areas of operation. Telekom Malaysia’s de-merger of its regional assets is likely to bring in a strategic partner which will further highlight M&A activity. Others like SingTel remain active buyers.
Cazenove has set fair values of $3.50 and $3.35 on StarHub and SingTel respectively.
TELCOs – BT
Telco stocks expected to ring in good value
Analysts see them as fairly safe bets in times of economic uncertainty next year
SINGAPORE’s three telco stocks are among the best bets as defensive stocks for next year amid economic uncertainty and continuing volatility in the financial markets.
Not surprisingly, Singapore Telecommunications, the biggest listed company by market capitalisation here, gets the most votes.
But StarHub and M1, ranked the Number 2 and 3 telco players, have their own fans, too, who look to the smaller telcos for their high dividend payouts.
Telco stocks will continue to perform well next year benefiting from the liberal foreign workers policy as well as Singaporeans’ continuing love affair with the handphone.
They also offer strong recurrent cash flows and attractive dividends and cash payouts. In addition, the telcos’ focus on their own business and their conservative management teams are reassuring to shareholders in that they hold no nasty surprises in terms of investments in high-risk financial instruments or foreign currency trades that other companies have bought to maximise returns on their spare cash.
‘With rising oil prices and lingering concerns about the impact of the sub-prime crisis on the US economy, we continue to maintain a defensive stance focusing on stocks and sectors with good earnings visibility, reasonable valuation and attractive yield,’ said Lim Jit Soon, Citigroup Singapore strategist, in a report last month.
‘We overweight telcos, media, banks and conglomerates. We are neutral, property and underweight transport, tech, consumer staples and healthcare,’ he said.
DBS Vickers Securities’ Sachin Mittal this month said the telecom sector is a direct beneficiary of healthy economic and population growth from the influx of foreign workers and tourists.
The pre-paid mobile phone subscriber growth is estimated at around 150,000 every year for the next 10 years.
DBS has forecast 6.5 per cent economic growth in 2008.
SingTel gets the most votes from analysts for its strong performance and ability to win the lion’s share of new subscribers.
SingTel is also the top choice for its investments in the top growth markets in the region – in particular, its 30 per cent stake in India’s Bharti and 35 per cent interest in Indonesia’s Telkomsel.
Even potential regulatory reversals on the spectrum front at Bharti and recent anti-monopoly rulings in Indonesia are seen as small risks on the horizon.
Macquarie Research analyst Ramakrishna Maruvada calls SingTel the ‘perfect cocktail’.
‘Our positive thesis rests on three planks: fundamental value driven by Indian investment and prospects for capital management; supportive relative valuation metrics; and top-down thematic considerations amid global credit concerns,’ he said.
Mr Maruvada said SingTel’s estimated $4.5 billion surplus capital by FY 2009 provides room for its regional expansion strategy or capital management initiatives.
He added that market focus on credit issues has led to a global re-rating of liquid telecom stocks offering diversified exposure to emerging markets. ‘SingTel benefits from this theme.’
It isn’t that the three telcos don’t face risks.
These include mobile number portability to be introduced next May and the nation-wide broadband network which will bring in more competitors.
But their strong cash flow generating ability trumps most risks.
A UBS report on the 2008 outlook for Asian telecoms said that as the markets mature, many operators are facing a similar enviable dilemma: slowing topline growth and a build-up of cash.
UBS estimated SingTel’s dividend yield to be 3.5 per cent and 4.1 per cent for 2007 and 2008, respectively.
For StarHub, it forecast dividend yields of 13.2 per cent and 5.4 per cent; and for M1, it’s 15.5 per cent and 7.7 per cent.
DBS’s Mr Mittal sees 3.6 per cent cash yield for SingTel, 5.3 per cent for StarHub and 7 per cent for M1 in the current year.
Going forward, he expects StarHub and M1’s total cash yield to be up to 10 per cent for the next one to two years as a result of capital management initiatives.
M1 – CIMB
Market share erosion on SingTel assault
Market share erosion to persist
We have updated our subscriber market share assumptions to reflect our view that SingTel remains focused as aggressor in Singapore’s mobile market and is poised to gain further market share in terms of subscriber but this will come primarily at M1’s expense. However, we believe the pace of SingTel’s subscriber market share gains should slow in 2008 as we expect StarHub to defend its subscriber market share more aggressively.
We believe that SingTel’s bundling strategy is an offensive strategy (customer acquisition) against M1 which lacks bundling capability but is a defensive strategy (customer retention) against StarHub. This is likely to result in SingTel gaining postpaid mobile subscriber share from M1. We also expect SingTel to use price as a competitive weapon to capture prepaid market share with M1 bearing the brunt of such as a move.
Valuation and recommendation
Maintain Neutral with reduced target price of S$2.29. Our earnings estimates are reduced by 0.5-1.8% for FY07-09 as a result of our revised markets share assumptions. This lowers our DCF (WACC: 7.9%, Terminal growth: 1%) valuation to S$2.29 from S$2.40 previously. While downside risk for M1 is limited by potential yield of over 8%, M1 lacks upside catalysts as it continues to face increasing competitive pressure from SingTel and StarHub. Visibility of NGNBN growth opportunities is low at this juncture and we do not see compelling reasons for M1 to be an M&A target.
M1 – OCBC
High yield defensive play
Good results due to lower costs and interest expenses. MobileOne (M1) recently delivered a good set of 3Q07 results. Revenue came in at S$200.2m (flat QoQ, +5.8% YoY) with net profit at S$43.6m (+8.0% QoQ, +1.6% YoY). The stronger sequential bottom-line was due to lower operating expenses (specifically due to lower handset costs) and borrowing costs (due to debt repayment).
Number portability likely in 1H08. Moving into 2008, M1 expects mobile number portability (MNP) to be introduced by 1H08. Prior to MNP introduction by regulators, the market place is likely to heat up with the 3 telcos attempting to tie up customers with attractive promotions. Presently, we are seeing some evidence of pre-MNP competition. More importantly, this in turn is likely to raise acquisition and retention costs, thus eroding margins even more. However, unlike its rivals, M1 does not offer many other services to spread its costs. As such, we see MNP to be negative to M1.
Opportunity for wireless broadband. In order to capitalize on the broadband market growth, M1 has launched its High-Speed Packet Access (HSPA) which is a wireless broadband system piggybacking on its 3G network. The new system will offer downlink of 3.6Mbps or 9-10 times faster than current speed. However, the window of opportunity on its mobile system could be short-lived with the roll-out of the free wireless broadband access under the proposed National High Speed Network. Indeed with M1’s introduction of its wireless broadband, its rival has recently also launched similar offering.
M1 is a defensive yield play. M1 has underperformed over the last 12 months losing over 8% in capital value. We believe the key reason is due to its inability to grow and that is as a result of its limited telco service offerings. M1 remains a very profitable business with ROE of over 21% (compared to SingTel’s 4.8%), albeit mature and with not much growth. However, its key attraction remains its very generous dividend policy of paying out at least 80% of profits. For FY08, we project a payout of 15 cents giving investors a return of about 8%. This together with a potential upside of about 20% to our fair value of S$2.33 makes M1 a very attractive and defensive proposition. We maintain our BUY rating.
TELCOs – OCBC
2008 likely to be challenging year
Key drivers in 2008. Looking into 2008, Singapore’s telco sector is likely to face some issues. This includes S$ appreciation vis-à-vis other currencies, stock market volatility, nationalistic sentiment against sovereign company/fund investment, higher inflation rates. Against this uncertain climate, our stock selection criterion is defensiveness in earnings. We prefer telcos with pure Singapore exposure, high earnings visibility, high dividend payout and with a non-aggressive growth strategy.
Number portability encourages switching. Mobile Number Portability (MNP) will be introduced in 2008, and this is likely to be preceded by intensive competition to lock in existing and new customers. There is some evidence that aggressive marketing has already started, and this is reflected in some telcos’ willingness to sacrifice revenue growth at the expense of subscribers. Our OIR’s Economic Matrix shows this clearly. With anticipated competition, there is likely to be margin erosion. However, depending on the individual telcos growth strategy some could be affected more than others.
NBN: Does return justify investment? 2008 will see the bidding for the National Broadband Network (NBN). Investment in the NBN network is expected to run into the billions and its tariff charges are likely to be heavily regulated. The return is unlikely to be very high, as it is on a competitive bid basis, tariff charges are likely to be regulated, and return may not commensurate with the high investment costs.
StarHub reigns supreme in pay-TV market. In 2007, SingTel entered the Pay-TV arena with Mio TV. However, we do not see the take-up rate to be high and this perhaps explains SingTel’s promotion to offer free Mio TV with its broadband packages. We see Mio TV to need to revamp its content and differentiate itself to tap onto undiscovered demand to compete in the Pay-TV market.
StarHub and M1 our top picks for 2008. As we move into 2008, telcos are likely to face a challenging environment on both the macro and micro fronts. Our stock selection criterion is thus defensiveness in earnings. In that context, our preferred telcos are StarHub and MobileOne (M1).