SGX Yield Stock

Handset subsidies in freefall

• Maintain NEUTRAL on sector with BUY on StarHub and M1 unchanged. M1 preferred for likelihood of special dividend.
  
• Lower handset subsidies for popular models such as Samsung Galaxy S5 and HTC One M8 should see telco margins benefit.
  
• Government cut on SIM cards from 10 to three per sub could hurt prepaid mobile revenue.
  

What’s New

The higher prices of three new major handsets launched last week confirmed our view that handset subsidies would decline this year. For basic plans, the Samsung Galaxy S5, for example, received the lowest level of subsidies yet, ie, SGD369-380, down by 21-22% from SGD469-490 for the S4 (in 2013), and lower still from the S3, when the subsidy was as high as SGD550 (in 2012). Similarly, subsidies for the just-launched HTC One M8 fell by 24-28% to SGD320-360 from SGD420-499 for the original HTC One, launched in 2013.

What’s Our View

We think there could be upside to EBITDA margins from the trend towards lower subsidies. Subsidies had already been reduced last year for the Galaxy S4 and even the most premium of handsets, the iPhone 5S, saw a slight reduction of 1-5%, down to SGD471-483 from SGD475-508.

We estimate that 2013’s subsidy reduction benefited SingTel and StarHub’s EBITDA margins by 2ppts. For both telcos, it was quite clear that margins improved in the quarters the Galaxy S4 and the original HTC One were launched compared to previous models. For M1, the picture was not so clear, perhaps due to its accounting treatment for iPhone subsidies, but we believe its underlying profitability should also have improved.

This year’s subsidy reduction is the highest yet in recent years. We therefore maintain that margin guidance by the telcos, in particular StarHub, is conservative and anticipate further upside.

On a less positive note, the government’s cut in the number of prepaid SIM cards allowed to be purchased from 10 to three per subscriber could have a negative impact on prepaid revenue, as many foreign worker agencies buy up to 10 cards each time for their workers. Prepaid revenue accounts for 13%, 19% and 25% of M1, StarHub and SingTel’s Singapore mobile revenue, respectively.

We maintain BUY on StarHub and M1, with a preference for M1 as we think there could be another special dividend this year. Usually, M1’s special dividends would equal the final dividend.

4QCY13 results mostly tracking our estimates

• All largely in line
  
• Outlook still muted
  
• Yields are bit more decent
  

StarHub missed our forecast

Both M1 and SingTel reported 4QCY13 results that came in within our expectations, while StarHub’s results tracked below forecast. M1’s core FY13 earnings was 3.5% above our full-year forecast and SingTel’s 9MFY14 earnings met 73% of our FY14 estimate. But due to lower-than-expected EBITDA margin, StarHub’s core FY13 earnings was 5% below our forecast. Interestingly, M1 declared a special dividend, which brought its total payout to 121% of earnings; StarHub kept its payout at S$0.20 as guided.

Review of Singapore mobile operations

Total post-paid mobile subscribers grew by a stronger-than-expected 2% QoQ to 4.53m in the Dec quarter, led by StarHub (+5.2%), SingTel (+1.1%), then M1 (+0.4%). Meanwhile, the decline in monthly ARPUs appears to be stabilizing; and telcos are optimistic that ARPUs should improve as more subscribers switch over to the new tiered pricing plans with less generous data bundles.

Little change to FY14 outlook

M1 continues to expect moderate single-digit earnings growth, although capex will be slightly higher at S$130m (versus S$125m in FY13). SingTel still sees mid-single digit decline in group revenue and low-single digit fall in EBITDA for FY14 (ending 31 Mar); but expects lower S$2.2b capex spend versus S$2.5b guided previously. StarHub is still guiding for low single-digit revenue growth with 32% EBITDA margin (vs. 32.9% in FY13).

Yields are still decent

As before, the spectre of rising interest rates is looming; but the recent pullback in the telcos’ share prices is starting to bring dividend yields back towards the 5% handle (4.8% average forecast). Hence we think that these stocks should continue to have a place in any portfolio also for their defensive earnings. Maintain NEUTRAL on the sector.