2QCY10 Scorecard; Maintain Overweight

2QCY10 results show modest margin recovery. All the three telcos – M1, SingTel and StarHub – showed some modest recovery in EBITDA margins in their 2QCY10 results recently; but this was possibly due to the lull before the anticipated launch of the new iPhone 4G on 31 Jul. Both M1 and StarHub declared interim and quarterly dividend of S$0.063 and S$0.05, respectively.

Review of operations. And because of this lull, we note that equipment sales fell during the quarter, and this also brought acquisition costs for M1 and StarHub lower; although SingTel saw an increase. But with the increased usage of smartphones, we note that ARPUs have continued to rise for both SingTel and StarHub; though flat for M1. Meanwhile, there has been little change on the broadband front; we suspect some inactivity may be due to the impending roll-out of the NBN, which has been slightly delayed to 3Q10. On Pay TV, SingTel provided more colour on its mio TV segment, while StarHub managed to retain its subscriber base and ARPU in 2Q10. But we note there was some distortion due to the World Cup and 3Q numbers should give a clear picture of the landscape.

Stable outlook for 2010. Going forward, all the three telcos expect their Singapore operations to remain stable or show slight growth, but most note that EBITDA margins are likely to decline slightly this year. StarHub for example, expects its EBITDA margin to hover around 28% vs. the historical average of 32-35%. The telcos have also kept their earlier capex guidance or even reduced it slightly in the case of M1. 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 45-60% of underlying earnings; StarHub to pay S$0.20/share, or S$0.05/share per quarter.

Maintain Overweight. 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. Meanwhile, we are also in the process of reviewing our fair value for StarHub.

NBN- the moment has arrived

• Two new entrants in the broadband sector, five more expected by end of 2010.

• The real battle is for SME and corporate customers, where EBITDA margins are much healthier.

• StarHub’s estimated 25% of earnings and SingTel’s 10% of group earnings would be subjected to competition from new entrants.

Two new entrants, five more expected. SuperInternet and LGA are two new entrants as retail service providers (RSPs). LGA would target mainly SME and corporate customers, while SuperInternet would compete in the consumer segment. NucleusConnect expects five more RSPs to enter the sector by the end of 2010. SuperInternet came out with the most aggressive monthly price of only S$49.80 for 100 Mbps speed compared to S$124 charged by StarHub for a similar plan before the launch of NBN. However, SuperInternet would not offer triple play bundling of mobile, pay TV and broadband as offered by StarHub.

Pricing plans suggest aggressive SuperInternet and M1. SingTel announced monthly retail pricing of S$85.90-S$109.90 for 150 Mbps-200 Mbps plans, which is quite reasonable compared to approx S$40 for the 6 Mbps plans being offered currently. However, SuperInternet and M1 announced 100 Mbps plans for only S$49.80 and S$59 respectively compared to S$124 charged by StarHub for a similar plan before the launch of NBN. We expect StarHub to offer lower price post NBN launch. M1 has solid island-wide distribution and branding, so incumbents need to be most cautious of M1, in our view.

SingTel has confirmed that it would be using its own OpCo in addition to StarHub’s NucleusConnect. In fact, SingTel’s OpCo would also compete with NucleusConnect in the wholesale of bandwidth to RSPs. We like to remind investors that NetCo is allowed to sell its capacity to other OpCos, only if NucleusConnect’s market share exceeds 25%. This should not be a hindrance for NetCo as StarHub (natural customer of NucleusConnect) already exceeds 25% market share.

Prefer SingTel and M1 to StarHub. Due to its more diversified earnings base, data and Internet segment accounts for an estimated 10% of SingTel’s group earnings. For StarHub, data and broadband segment accounts for an estimated 25% of earnings. M1 is the only telco to gain from NBN and we expect the share price to benefit as market gains confidence in M1’s execution.

Telcos take their fight to the next level

SingTel, StarHub and M1 rolling out their ultra high-speed broadband packages

Local telcos SingTel, StarHub and M1 are taking their bitter rivalry from this generation to the next in a services showdown on Singapore’s next information superhighway.

The country’s new fibre-optic backbone opens for business today and the three telcos will go head-to-head on an entire spectrum of new ultra high-speed broadband packages for consumers and businesses.

The first salvo under Singapore’s new era of broadband competition was fired by SingTel yesterday morning with the unveiling of new offerings that take advantage of the massive speed boost that comes with the arrival of pervasive fibre-optic rollout.

M1 followed suit later in the day and StarHub is expected to do so tomorrow.

SingTel also laid months of speculation to rest by announcing plans to compete with StarHub in a third segment – the wholesaling of fibre-optic bandwidth to other players that are keen to offer Internet-related services to local customers.

By dipping its toes into this market, SingTel will be competing directly with StarHub subsidiary Nucleus Connect.

Until yesterday, Nucleus Connect is the only so-called operating company (OpCo) that was sanctioned to resell ultra high-speed bandwidth packages to other Internet service providers on Singapore’s government-backed fibre-optic network.

It received a $250 million subsidy from the Infocomm Development Authority of Singapore (IDA) to help defray its set-up costs.

In return, Nucleus Connect has to play by a strict set of government rules including providing transparent and non-discriminatory pricing to all buyers. In addition, the firm has to be run independently from its parent StarHub as part of IDA’s operational separation mandate.

However, this separation requirement does not apply to SingTel as the firm is not the government-anointed OpCo, according to its Singapore chief Allen Lew.

Exemption from these government rules also means that SingTel could potentially offer discounts or rebates instead of having to abide by the IDA’s equal pricing policy.

In addition, SingTel will also be using its own fibre-optic pipes on top of the ones that are run by Nucleus Connect.

The company plans to use its own fibre-optic backbone to provide connectivity to commercial customers and rely on Nucleus Connect’s infrastructure for the consumer segment only, Mr Lew told reporters at a media briefing yesterday.

Some 4,000 commercial buildings will be wired up with SingTel’s fibre-optic links by this November, including 1,500 that are predominantly used by small businesses, the firm revealed.

‘We’ve been expecting it (SingTel’s plan to wholesale fibre-optic bandwidth). When you have discriminatory pricing, and you have to go in to negotiate, it’s a long and tough process,’ Nucleus Connect chief David Storrie told reporters at a separate media briefing yesterday evening.

‘With our model, it’s clear what you’ll get,’ he stressed, adding that the firm would consider adjusting its pricing to remain competitive.

Five companies have already committed to buying bandwidth from Nucleus Connect. These include the three existing telcos, as well as homegrown communications firms SuperInternet and LGA Telecom.

More could sign up when the fibre-optic network is fully completed in two years’ time, he added.

Some 40 per cent of local households are already wired up with fibre-optics and nationwide rollout is set to be completed by end 2012.

‘I think the number of five we have will grow. Interested parties, especially overseas operators, say they will be back when coverage is complete,’ Mr Storrie said.

On the consumer front, SingTel raised the game with four new consumer plans that promise to double access speeds by charging slightly more than what StarHub charges for its highest-end broadband package today.

By paying $95.90, consumers can enjoy download speeds of 200 Mbps (megabits per second), twice as fast as its rival’s 100Mbps plan, which is priced at $86.88.

Besides allowing speedier movie streaming and music downloads, the company also offers increased uplink speeds of up to 100Mbps. This means that users can upload high-resolution pictures and videos at a fraction of the time of what it would have taken them with today’s cable broadband and ADSL (asymmetric digital subscriber line) broadband packages.

In addition, SingTel is bundling other perks such as high-definition video chats and free Web-based storage and even free movies. Soccer fans can enjoy their Barclays Premier League fix along with their new high-speed broadband plan for $109.90.

‘Fibre is just the basic hygiene factor to get into the home. Offering pure access services doesn’t really make sense,’ said SingTel’s Mr Lew. The company is also offering a lower-end 150Mbps plan for $85.90 monthly.

M1 has claimed the mantle of offering Singapore’s fastest broadband plan for now at 1Gbps (gigabit per second), five times the speed of SingTel’s latest offering. However, users will have to pay a monthly fee of $399 to enjoy the speed boost.

At the same time, Singapore’s smallest operator hopes to offer consumers more bang for their broadband buck with a range of lower speed plans, including one which offers 100Mbps download speeds for $59 a month.

However, M1’s speed advantage is expected to be short-lived as StarHub could match the offer by as early as tomorrow.

‘Incumbents are likely to sell FTTH (fibre-to- the-home) services as faster speeds and pricing is likely to be lower if you compare on a cost per bps basis. I think it will take some time for the FTTH services to become mainstream,’ said telecommunications consultant Soh Siow Meng.