SGX Yield Stock

3Q12 results round-up

Telcos’ 3Q12 results were a mixed bag. StarHub surprised on the upside due to lower traffic costs while SingTel disappointed. The main notables were 1) the deceleration of mobile revenues, 2) acceleration of fibre broadband net adds, and 3) rise in pay TV competition.

We remain Neutral on the sector as we see no major rerating catalysts. StarHub (Outperform) is still our top sector pick as it offers the highest dividend yield among Singapore telcos and upside potential to its dividends due to its strong FCFE and robust balance sheet.

Mixed results

SingTel’s 3Q12 results missed expectations because of the drag from Bharti which overshadowed the anticipated strong showing in Singapore. Overall, SingTel continued to gain market share in all segments: mobile, fixed broadband, and pay TV. StarHub’s 3Q trumped expectations with the help of lower traffic costs but M1’s results undershot due to unexpectedly high subscriber acquisition costs (SAC).

Mobile revenues dipped

Industry mobile revenue growth slowed to 1.1% yoy from 1.5% in 2Q12 and 4.2% in 1Q12. The slowdown came from lower roaming revenue due to less inbound and outbound roaming. M1’s and SingTel’s mobile revenues rose qoq (seasonality) but StarHub (-1.4% qoq) disappointed as it had lowered roaming rates with the Vodafone group. SingTel is still gaining market share, thanks to its aggressive bundling of mobile broadband with fixed broadband. Its revenue share rose 0.5% pts to 51.7% at the expense of StarHub whose share fell 0.5% pts to 32.2%.

Fibre accelerated

3Q fixed broadband revenue accelerated to 8% yoy because of an 11% jump in SingTel’s 3Q revenue. SingTel captured 59% of new subscribers in 3Q, similar to 60% in 2Q. The telco now has 58% fibre broadband market share.

Pay TV race heats up

SingTel’s mioTV notched up 4.7% qoq growth in revenue and raised its market share by 2% pts to 24%, driven by a combination of higher ARPU and subscribers. With a new line-up of >130 channels, SingTel has substantially narrowed the gap with StarHub’s 157 channels, eroding the latter’s differentiation and dominance.

3QCY12 REVIEW – STILL OVERWEIGHT

• 1 hit, 2 near-misses
  
• Defensive story intact
  
• Yield compression also likely
  

StarHub again above forecast

Out of the three telcos, StarHub again posted 3Q12 results that were above our forecast, aided by a stronger-than-expected margin recovery (mainly coming from lower traffic expenses). M1 and SingTel both posted results that were slightly below our estimates, with the former citing continued upfront smartphone subsidy expensing for the shortfall, and the latter hit by weaker Optus performance and also a slide in regional currencies against the SGD.

Review of Singapore mobile operations

On the core post-paid mobile market, SingTel continues to dominate with ~48% share, then StarHub with ~28% and M1 ~26%. But we note that post-paid subscriber base grew 55k QoQ to 4180k, even though the market already has a penetration rate of nearly 150%, with some 70% of post-paid subscribers using smartphones. Monthly ARPUs are relatively stable; but could see increases once LTE (or 4G) takes off from 1Q13, aided by the introduction of more LTE-enabled phones and also tiered pricing plans with less generous data bundles.

Biggest surprise from SingTel

Both M1 and StarHub are still guiding for relatively stable outlook for 2012, albeit with potential erosion in service EBITDA margins. However, SingTel surprised by guiding for consolidated group revenue to see a low single-digit (versus single-digit growth previously), mainly dragged down by continued weakness in Australia. However, we think that all the three telcos should continue to generate very positive operating cashflows and this should keep their healthy dividend payouts intact.

Maintain OVERWEIGHT

While the three telcos have performed reasonably well this year, led by StarHub, we continue to like their defensive business against the still-uncertain economic backdrop. Further yield compression could also be another price catalyst over the next 12 months. Hence we maintain our OVERWEIGHT rating and keep M1 as our top pick.