Review of 1Q12

1Q12 telco results reflected the usual seasonal weakness. Key features were: 1)subdued service revenue;2) muted sector margins;and 3)a rebound in ARPUs forfixed broadband.SingTel continued to gain market share in broadband and pay TV, at StarHub’s expense.

All three telcos’ results met our forecasts. Maintain Neutral on the sector as we see no major catalysts. StarHub (Outperform) is our top pick as its net debt/EBITDA is at a multi-year low, ripe for the payment of higher dividends.

SingTel continues to gain share

While its share of mobile revenue peaked in 4Q12, SingTel gained share in fixed broadband and pay TV. This reflects its strategy of garnering more customers with the view of selling them more services in future.

Gearing fell

Gearing improved for all three, with StarHub’s falling to 0.49x, the lowest since 2Q06. Although StarHub has acknowledged that its gearing is very low, it plans to maintain its dividend payout of 20cts in 2012 and does not intend to go for capital management. We believe StarHub is over-conservative and should loosen up its dividend purse strings

Service revenue dipped on seasonality

Overall performances were subdued because of seasonality. Industry revenue dipped 1.3% qoq (but rose 3.8% yoy), due to seasonality and lower equipment sales at StarHub and M1. SingTel’s and StarHub’s service revenue weakened qoq while M1’s grew slightly, thanks to subscriber growth.

Stable and muted guidance

SingTel expects revenue to grow by low single digits with margins to ease. Its capex guidance does not reflect the cost of 4G spectrum in Australia which will be auctioned at end-2012.

StarHub has kept to its 2012 guidance of low-single-digit revenue growth and flat EBITDA margins. To our disappointment, it has maintained its DPS, which we think should be raised.

M1 sounded more positive, expecting its momentum in 1Q to continue through the year, mainly led by mobile data and fixed services.

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.

• Positive earnings for SingTel & Starhub

• Starhub is still the highest yielding Telco counter

• SingTel dominates fibre market share

• Neutral on SingTel & Starhub, Reduce on M1

Earnings Surprise?

Starhub’s results beat our expectations for the second consecutive quarter with profit increase of 28% y-y. While revenue increased by merely 6%, better cost control due to lower marketing and promotion expenses improved Starhub’s profitability. M1’s net income declined by 5% y-y as operating expenses outpaced the relatively stagnant top line growth. Adjusting for the effects of a one off gain from an exceptional S$270mn tax credit received, SingTel’s results were in line.

Operational Trends

Starhub & M1 reported stagnant Postpaid Mobile subscriber base in the quarter. SingTel added 30k subscribers, but reported a dip in Postpaid ARPU in the quarter. For the PayTV market, SingTel added 15k subscribers and increased its market share to c.40%. By our estimate, SingTel dominated the fibre broadband space with a market share of 60%, with M1 ranking second with a 23% share. While Starhub does not disclose its fibre base, the company probably has a lower fibre subscriber count as it could still offer high speed MaxOnline plans on its cable network.

Recommendation

Fundamentally, we rate SingTel & Starhub as Neutral and have a Reduce rating on M1. We continue to prefer SingTel for its growth potential outside of Singapore and cheaper valuation over its local peers.