EXPECTING HIGHER CAPEX IN 2013

• 1 near-miss, 2 hits
  
• Higher capex guidance
  
• Yield story likely unchanged
  

M1 below, rest mostly inline

Out of the three telcos, M1’s 4Q12 results were slightly below our forecast while the other two were mostly in line. Nevertheless, we note that M1 not only managed to post a recovery in its EBITDA margin, but also was the highest among the three. As M1 had earlier guided, the recovery was due to the upfront expensing of its smartphone subsidy. M1 also surprised with a special dividend of S$0.017/share on top of its final dividend of S$0.063. StarHub declared a quarterly dividend of S$0.05 as guided.

Review of Singapore mobile operations

Core post-paid mobile subscribers grew by another healthy 2.0% QoQ to 4.3m in Dec quarter, led by SingTel with 2.5%, StarHub 1.7% and M1 1.6%. Monthly ARPUs were also quite stable; and all three telcos expect to see uplifts this year as more users switch over to the new tiered pricing plans with less generous data bundles; this aided by the introduction of more LTE-enabled smartphones.

Most expecting higher capex this year

For 2013, M1 expects to see a moderate earnings growth as it continues to benefit from the upfront expensing of smartphone subsidies; also expects to maintain a dividend payout of at least 80% of underlying profit. For StarHub, it expects single digit revenue growth and an EBITDA margin of 31%; no change to its quarterly S$0.05/share dividend guidance. But both telcos have started to guide for higher capex this year, which they continue to roll-out their 4G networks and also to cater for the growing data usage pattern. Lastly, SingTel has kept its previous guidance, but note that its year-end is in Mar.

Maintain OVERWEIGHT

For now, we maintain our OVERWEIGHT on the sector. But as the telcos have already done quite well YTD, further capital appreciation may be limited, although dividend yields are still relatively attractive. M1 remains our top pick.

TELECOM | OVERWEIGHT

19 Feb 2013

Sector Update

Singapore | Telecom Sector Asia Pacific Equity Research

MICA

Focus On Dividends Still

Underweight. We are underweight on the telco sector mainly because of our Sell call on SingTel, which is being challenged on many fronts, both domestic and overseas. It is into its fourth year of declining earnings and if this continues, radical action may be called for at the management level. This year, all the telcos will be focusing on how to monetise data use, but we expect the benefit flow to be gradual. Subscriber churn in Pay TV is also likely to rise, mainly from StarHub, as SingTel beefs up content but we think this will be temporary. Earnings growth for the sector will be plodding at best. As such, we see the telco sector as still a sector to tap for dividends, and StarHub offers the best bet for sustainable dividends, especially if raises its 2013 annual DPS on record low net debt/EBITDA.

LTE/4G to see faster adoption than 3G. It took three years for 3G mobile subscriptions to exceed 2G as (1) 3G handsets were very limited in the early days, (2) were significantly more expensive than 2G handsets and (3) there was also very limited content positioned specifically for mobile screens, which are not suitable for desk top oriented content. There are now more 4G handsets available and it is very likely that users upgrading to new handsets will want them to be 4G capable. In addition, content customised for mobile handsets’ smaller screens is much more common now. As such, we would expect to see LTE adoption to be faster than 3G.

However, challenge is still in monetisation. Data monetisation will be the top priority in 2013. Despite surging data usage in the last few years on the back of the popularity of the iPhone and as more online content was made modified for small screens, past attempts to monetise this trend had been foiled by the universal availability of unlimited data plans. Now that the telcos have imposed much lower caps (from 12GB to 2GB) since 2H last year, the telcos now have a fighting chance to boost contributions from data. This will be aided by a greater diversity of LTE handsets, network coverage and price plans. However, given that less than 15% of mobile users exceeded 2GB monthly to begin with, the boost is likely to be gradual in 2013.

SingTel to be more aggressive in Pay TV. Last year, SingTel added 40 Fox International channels including popular channels such as National Geographic, StarWorld and Fox Movies. It also renewed the next three seasons of the Barclay’s Premier League ahead of StarHub on a non-exclusive basis. This year, we expect SingTel to be aggressive again in adding content as it continues to build up its channel line-up to match StarHub. StarHub still holds an edge in the depth of its content offerings especially in niche demographics but SingTel has a superior sports lineup.

Spectrum auction sooner rather than later. IDA, Singapore’s telco regulator, is expected to hold an auction in 2013 to refarm existing 1800 MHz, 2.3GHz and 2.5GHz spectrum bands from their current 3G use to 4G. The auction is designed to ensure service continuity beyond 2015 and 2017 when existing rights expire. As IDA is typically prudent in its long-range planning, we would not be surprised if the auction is held before mid-2013. The outcome is likely to be benign as sufficient spectrum is available and rationality should prevail amongst the telcos. While no reserve price has been set yet, we do not expect it to be significantly higher than the last round in 2010.

Underweight. We are underweight on the telco sector mainly because of our Sell call on SingTel, which is being challenged on many fronts, both domestic and overseas. In Singapore, margin downside is the biggest challenge as SingTel continues to compete on content even as it restructures away from a pure telco toward a multimedia strategy. In Australia, competitive pressures could start to simmer again given recent new capital received by smallest telco VHA, while India continues to be a nightmare of regulatory risks. SingTel is into its fourth year of declining earnings and if this continues, radical action may be called for at the management level.