1Q09 Scorecard

Resilient 1Q09 results as expected. All the three telcos – MobileOne (M1), SingTel and StarHub – reported a pretty resilient set of results recently. M1’s 1Q09 earnings were slightly ahead of our forecast but that was mainly due to an one-off tax credit; EBITDA margin also improved due to slight easing in competition. SingTel’s 4Q09 earnings were much better than expected, aided by a strong domestic market performance. StarHub’s 1Q09 earnings were within expectations, but the boost came from lower taxes; its mobile business recorded a mild decline.

Review of operations. On the mobile front, we note that the recession has impacted consumer spending in the March quarter; this has led to a decline in mobile post-paid ARPUs. And in line with the weaker demand, most of the telcos have further scaled back their acquisition costs; the exception being SingTel, which clocked in at S$290/ customer, up QoQ but down YoY. And in terms of market dynamics, we see that M1 has lost post-paid market share, which does not come as a surprise, given its lack of bundling abilities. On the broadband front, the net additions for both SingTel and StarHub have slowed, partly due to the economic slowdown and also the saturation in the market, which has now hit 109.5% (up from 99.9% in 4Q08). And while StarHub managed to add more customers, we note that its ARPU has been declining, whereas SingTel’s ARPU has managed to remain quite stable.

Stable outlook for 2009. Going forward, all the three telcos expect their Singapore operations to remain stable or show slight growth, with EBITDA margins remaining relatively steady; this as they strive to reduce costs to keep pace with the expected softening in operating revenue. But due 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$0.18/share, or S$0.045/share per quarter.

Maintain Overweight. Although there has been a steady switch into highbeta stocks on hopes of a rapid recovery in both the economy and corporate earnings, we are not entirely convinced. And until we see more concrete signs of a rapid recovery, we would still advocate holding on to these defensive counters for their attractive dividend yields and as a means of diversification. Maintain Overweight.

Telcos’ quarterly results show resilience

But signs of slowdown in mobile market point to need for diversification to sustain growth.

SINGAPORE’S telecommunications trinity walked the talk in the curtain raiser to 2009 with an encouraging set of quarterly results. But despite proving their defensive mettle, signs of a slowdown in the saturated mobile market could point to diversification as the only route to maintain local growth in the long run.

To recap, MobileOne flagged off the telco earnings season on a high note by beating most analyst estimates with its 10.3 per cent jump in Q1 net income to $41.9 million. This improvement was largely the result of lower taxes and tighter cost control.

StarHub kept the momentum going with a 3 per cent increase in first-quarter profits to $82.5 million, helped by lower taxes and higher contributions from its pay-TV and fixed network businesses.

SingTel would appear to have upset the balance this week by turning in quarterly earnings of $903 million, a 17 per cent drop from last year.

However, this decline was largely pegged to negative currency movements and a poor showing from its key regional associates Telkomsel and AIS. If Singapore is used as the yardstick for comparison with its two rivals, SingTel’s local Ebitda (earnings before interest, taxes, depreciation and amortisation) actually rose 20 per cent to $578 million.

Market analysts reciprocated the trio’s performance with unanimous ‘buy’ calls as local telcos continue to live up to their reputation as defensive plays.

‘M1 outperformed the STI by 2 per cent YTD (year to date), but its solid 9 per cent yield is the key attraction,’ said DBS Vickers analyst Sachin Mittal.

StarHub, on the other hand, impressed market watchers with its ability to eke out better margins during crunch times. ‘We have raised our earnings estimates by 4.2 per cent to $310.9 million in FY09 on the back of improving margins,’ said Terence Wong, head of research at DMG & Partners.

Despite SingTel ending its fourth quarter with a lower bottom line, the recent appreciation of regional currencies, coupled with the improved outlook of its key associates, is expected to give the operator a boost this financial year.

‘We have revised our FY10 estimates up slightly (by around 3 per cent to reflect its resilient business) and introduced our FY11 estimates. We have also bumped up our SOTP (sum-of-the-parts) fair value from S$3.09 to S$3.18 to reflect the recovery in equities of its associates,’ OCBC Research analyst Carey Wong said in his client note. He expects SingTel to turn in a net profit of $3.42 billion this year on the back on a $14.32 billion turnover.

While the three operators have shown that they are still in the pink of financial health for now, the Q1 numbers did unravel some niggling signs of concern within their cellular core.

Singapore’s sky-high mobile penetration of 132 per cent leaves little room for new post-paid subscriber growth. In addition, operators are also feeling the pinch as consumers rein in their talk time during the downturn.

In particular, M1 lost 11,000 mobile subscribers during the quarter and the exodus pulled its market share down to 25.4 per cent in Q1. StarHub’s mobile revenue dipped 3.1 per cent in to $264.7 million as customers cut back on international calls and voice usage.

Even SingTel, which reported a 9.1 per cent increase in mobile sales to $370 million with the addition of more customers, admitted its subscribers are making less international calls and keeping within the talk time allocated to their respective subscription plans.

This has prompted SingTel to look into ‘adjacent markets’ such as pay-TV, Internet and mobile advertising, said its Singapore CEO Allen Lew. The launch of its new cross-platform advertising service, and its digital media subsidiary earlier this month are the flag bearers for SingTel’s diversification intent. In addition, it also has its overseas investments to help offset any weakness at home.

StarHub, on the other hand, may have to look more to its pay-TV business and come up with new subscription packages to appeal to the remaining half of the unconverted local households. This will buy time as it waits for its opportunity to extend its corporate connectivity reach when Singapore’s new fibre-optic network is minted in 2013.

Without a viable second business in the near term, market watchers say M1 will have to innovate on mobile pricing and subscription bundles to try and draw the crowds but its margins could be thinned as a result.

‘From the tone of the management, we gather that should its (M1’s) market share continue to fall, it will retaliate aggressively,’ said Mr Wong from DMG & Partners.