When roaming rates drop, S’pore telcos may pay a higher price

They have more to lose than their M’sian counterparts: analysts

SINGAPOREAN operators are likely to be hit harder than their Malaysian counterparts when the two countries start to ring in cheaper mobile roaming rates from next month.

This is because a higher proportion of their sales come from overseas calls. In addition, Singapore Telecommunications, StarHub and M1 have more inbound and outbound roaming usage on their networks in comparison to Malaysian operators, analyst firm DMG Research said in a report yesterday.

On Thursday, a two-year effort to curb the high cost of cellular roaming between Singapore and Malaysia finally bore fruit with both governments announcing that fees for making and receiving calls will be slashed by 20 per cent from next month and a further 10 per cent a year later.

The cost of sending text messages back home from across the causeway will be cut by 30 per cent in May and halved 12 months later.

Once fully implemented, it would mean that the cost of making a Singapore call from Malaysia would be slashed from 59 cents per minute currently to 46 cents in 2012. Sending an SMS would cost 30 cents by next May, compared with the prevailing rate of 60 cents per text message.

‘We estimate that roaming revenue makes up circa 10 to 25 per cent of Singapore telcos’ mobile revenue versus 8 to 10 per cent for Malaysian telcos,’ DMG said.

‘A reciprocal 20 per cent reduction in roaming tariffs between the two countries would slice off Singapore mobile revenue by 1 to 2 per cent compared to an estimated 0.5 to 0.9 per cent for Malaysian telcos, all else being equal,’ the company explained.

Malaysian operator Celcom had previously forecast its sales could shrink by 40 million ringgit (S$16.5 million) when the rate cuts are pushed through, while rival Digi said the impact on its revenue is marginal. Maxis on the other hand, expects sales to be hit to the tune of 6 million ringgit (S$2.5 million).

Local operators declined to reveal Malaysia’s contribution to their international services revenue but all three admitted the country is among their top mobile roaming destinations.

For its last financial year, SingTel derived $563 million from international call services while M1’s full-year revenue from this business segment stood at $129 million.

StarHub’s mobile roaming income is folded under its mobile sales, which stood at $302.7 million in 2010.

Instead of dragging down their top-line, local telcos say they are confident that the tariff reductions would instead boost their income by spurring greater usage.

‘We believe the downside on mobile revenues will be mitigated by the fact that operators actively share and swap minutes with one another,’ DMG added.

Other analysts BT spoke to also said local operators are likely to suffer a short-term hit but they should be no worse for wear in the long run.

This is the first time such a mobile roaming accord has been struck between two Asean member countries.

Authorities believe more could soon jump on the bandwagon, with Thailand being seen as the next likely candidate.

Reading the signals for 1Q11

• Maintain UNDERWEIGHT. We remain UNDERWEIGHT on the Singapore telco sector in view of cost pressures (albeit not as strong as 2010), weakness in fixed broadband and also the potential for multi-year margin erosion. We leave our earnings forecasts and target prices intact. M1 remains our top pick, for having the most upside from NGNBN and the most benefits from soaring inbound visitors, in our opinion. We continue to prefer Axiata and XL Axiata for exposure to regional telcos.

• 1Q11 themes. We broadly expect: 1) service revenue growth to be muted, in line with seasonal trends; 2) EBITDA margins to improve towards the tail end of the iPhone craze and also from lower advertising and marketing revenue; 3) data to continue replacing voice revenue; and 4) weakness in fixed broadband though stability in pay TV.

• Data to continue replacing voice. We believe data revenue should climb further to replace voice revenue as smartphone penetration deepens and take-up of data packs grows as subscribers access emails and social networks on the go. Non-SMS data now accounts for 18-19% of M1’s and SingTel’s revenue (StarHub does not provide breakdown) while 33-40% of revenue from the three telcos comes from data (including SMS). This has also resulted in the cannibalising of voice traffic.

• Margins to recover. Coming out of the festive period, we believe margins should improve as we see deflating subscriber acquisition costs in a traditionally slower period. In addition, the tail end of the iPhone craze and lower subsidies offered for devices should alleviate the pressure on margins.

• Expectations for M1. M1’s core profit is expected to be S$38m-39m in 1Q11, up 1-4% qoq. We expect revenue to weaken as handset sales fall though service revenue should rise 1-2% qoq. We expect margins to recover from lower advertising and marketing costs and as device subsidies drop from lower pricing points and lower subsidies provided. M1 is expected to release results on 15 Apr.

• Expectations for StarHub. We expect -3% to +4% qoq earnings growth for StarHub on margin improvements as lower subsidies prevail and also from lower advertising and marketing spend. We expect mobile revenue to rise on higher data take up as well as wireless broadband growth. However, fixed broadband revenue should be weak from lower ARPU net adds and as StarHub reached more of the lower-income group. Meanwhile, pay-TV revenue should be flat sequentially. StarHub is slated to release results on 4 May. We will be previewing SingTel’s results separately.

Cracks surfacing at the telco fort?

Japan’s disaster is shaking even stocks that used to help shelter investors from market turbulence

AN ebbing tide lowers all boats and this time around, even telecommunications counters that have helped shelter investors from past market turbulence appear to be reeling from aftershocks of the devastating earthquake which hit Japan last week.

Singapore Telecommunications, which is traditionally seen as a defensive play, also fell victim to the global market sell-down this week with its shares tumbling to a nine-month low of $2.85 yesterday.

‘Surprisingly, a number of incumbent telcos have been weak across the region despite the broader market volatility,’ said Sachin Gupta, a senior analyst at Nomura Securities.

Investors appear to be spooked by SingTel’s overseas exposure as global economies continue to be rocked by the uncertain fallout from Japan’s worst natural disaster in nearly 100 years.

The Republic’s largest operator derives 74 per cent of its Ebitda (earnings before interest, tax, depreciation and amortisation) from its Australian subsidiary Optus and its six mobile associates across the region.

‘SingTel is facing some uncertainties, especially on regulations in India and rising competition in the Australian market,’ Mr Gupta explained.

‘The sheer exposure of the group (SingTel) to overseas markets makes the stock susceptible to external volatility,’ said OSK Research’s telecommunications analyst Jeffrey Tan, adding that investors could also be worried about a potential loss in roaming revenue as traveller numbers start to dwindle.

‘SingTel has the largest pool of foreign shareholders and investors so it would be reasonable to expect the stock to suffer a bigger sell-down on the back of prevailing concerns in the region,’ he told BT.

Selling pressure also gripped SingTel’s US counterparts including AT&T, Verizon and Sprint Nextel this week. In the region, shares of Australian telco Telstra fell 0.38 per cent to close at A$2.64 yesterday.

The exception to the rule appears to be telcos with high and sustainable dividend yields, Nomura’s Mr Gupta noted.

Singapore’s smallest operator M1 is one such counter that is favoured by most market watchers. The company’s proposed cash payout of 17.5 cents per share for 2010 translates to a sizeable yield of 7 per cent.

M1 shares held steady for most of this week but edged down one cent to $2.38 yesterday. Both Nomura and OSK have a ‘buy’ rating on this counter.

StarHub received mixed ratings from analysts, with Nomura giving it ‘reduce’ call while OSK rates it as ‘neutral’. StarHub shares closed unchanged at $2.61 yesterday.

While Singapore’s second-largest operator is viewed to have a lower ceiling for growth compared to M1 this year, StarHub’s domestic focus and dividend yield should help limit its share price downside, analysts say.

Meanwhile, OCBC Research has a ‘buy’ call on all three local operators.

‘While we continue to like the telcos for their yields and defensive earnings, we do not see any big growth drivers for them this year and hence our sector call is neutral,’ said OCBC research analyst Carey Wong.