Singapore | Telecoms Sector
Asia Pacific Equity Research
TELECOM SECTOR | OVERWEIGHT
28 Aug 2015
Sector Update

Defensive business as usual
OVERWEIGHT
(upgrade)

Interest rate concerns overdone?
Analysts

Yields are pretty decent now
UPGRADING TO OVERWEIGHT
Carey Wong (Lead) ● +65 6531 9808
carey@ocbc-research.com
Andy Wong Teck Ching, CFA ● +65 6531 9817
2Q15 earnings mostly in line
For the Jun quarter, the three telcos reported results that were mostly
in line with our expectations. Although StarHub’s 2Q15 earnings were
also in line, it had a weaker-than-expected 1Q15; but with margins
likely to hold up, we think it should do better in 2H15. And as
expected, the three telcos have kept their guidance unchanged for the
year.
AndyWong@ocbc-research.com
Relative total return
1m
3m
Sector (%)
-8
-5
12m
1
STI-adjusted (%)
2
7
10
Price performance chart
Defensive business in uncertainty economic time
Overall mobile market continues to remain stable, with post-paid
subscribers inching up another 0.8% QoQ; monthly post-paid ARPUs
were also steady. And with 4G subscribers now making up 68% of all
mobile subscribers here, it comes as no surprise that the three telcos
are optimistic about rising data usage and further improvements in
ARPUs. Hence even in an increasingly uncertainty economic
environment, we believe that the main mobile business should do
relatively well; although we could see a drop in roaming income.
Interest rate concerns likely overdone
Recently, we have seen the prices of the telcos correcting quite
sharply, spooked by concerns of rising interest rates. However, with
the recent global market turmoil, coupled with the devaluation of the
CNY against the USD, the odds for a rate hike in Sep seem to have
dropped; some market watchers also believe that the quantum of hike
has also been reduced. As such, we believe that the current yields
have reached pretty attractive levels.
STH SPHP
Stock coverage ratings
BBRG Ticker
Price
M1 SP Equity
2.96
Fair
Value
3.66
ST SP Equity
3.85
4.38
BUY
STH SP Equity
3.59
3.96
BUY
Rating
BUY
Upgrade to OVERWEIGHT
As we had also recently upgraded StarHub from Hold to BUY, we now
have BUY calls on all three telcos; hence, we upgrade our sector
recommendation to OVERWEIGHT. Key risks include an unexpected
spike in interest rates and further depreciation in the regional
currencies against the SGD, but this affects mainly Singtel. While
there could still be a new entrant coming into the Singapore market,
we think that any impact is likely muted and would probably be felt
from 2018 onwards.
Please refer to important disclosures at the back of this document.
MCI (P) 008/06/2015
OCBC Investment Research
Singapore Equities
Exhibit 1: 2QCY15 Results
Jun 15 Quarter (S$ m)
M1
SingTel*
StarHub
276.8 (+16%)
4209 (+2%)
589.5 (+2%)
EBITDA
83.6 (+1%)
1241 (-1%)
194.5 (+4%)
Net Profit
44.3 (+1%)
895 (+2%)
99.1 (+5%)
29.5%
35.1%
Operating Revenue
Service EBITDA Margin
40.8%
Note: SingTel revenue includes Australia
Source: Telcos, OIR
Increases are YoY
Exhibit 2: Latest Guidance after 2QCY15 Results
Company
Latest Guidance
M1
Expects moderate earnings growth (in single digit)
Capex around S$120m (vs. S$140m in FY14)
Dividend payout of at least 80% of net profit
SingTel
Core revenue and EBITDA to grow by mid and low single digit level
Group capex of S$2.3b (vs. S$2.0b in FY14); FCF of S$1.5b
Dividend payout ratio kept at 60-75% of underlying earnings
StarHub
Low single-digit revenue growth; 32% service EBITDA margin
Capex around 13% (vs. 13.5% as FY14) of total revenue
Dividend target of S$0.20/share, or S$0.05 per quarter
Source: Telcos
2Q15 earnings mostly in line
For the Jun quarter, the three telcos reported results that were mostly in
line with our expectations. Although StarHub’s 2Q15 earnings were also in
line, it had a weaker-than-expected 1Q15; but with margins likely to hold
up, we think it should do better in 2H15. And as expected, the three
telcos have kept their guidance unchanged for the year.
Exhibit 3: Singapore’s Post-Paid Market
Source: Telcos, OIR
2
OCBC Investment Research
Singapore Equities
Exhibit 4: Post-Paid ARPU Trends
Source: Telcos, OIR
Exhibit 5: Broadband Trends
Source: Telcos, OIR
3
OCBC Investment Research
Singapore Equities
Exhibit 6: Pay TV Trend
Source: Telcos, OIR
Defensive business in uncertainty economic time
Overall mobile market continues to remain stable, with post-paid
subscribers inching up another 0.8% QoQ; monthly post-paid ARPUs were
also steady. And with 4G subscribers now making up 68% of all mobile
subscribers here, it comes as no surprise that the three telcos are
optimistic about rising data usage and further improvements in ARPUs.
Hence even in an increasingly uncertainty economic environment, we
believe that the main mobile business should do relatively well; although
we could see a drop in roaming income.
Exhibit 7: Singapore Yield Curve
Source: Bloomberg, OIR
Interest rate concerns likely overdone
Recently, we have seen the prices of the telcos correcting quite sharply,
spooked by concerns of rising interest rates. However, with the recent
global market turmoil, coupled with the devaluation of the CNY against
the USD, the odds for a rate hike in Sep seem to have dropped; some
market watchers also believe that the quantum of hike has also been
reduced. As such, we believe that the current yields have reached pretty
attractive levels.
4
OCBC Investment Research
Singapore Equities
Exhibit 8: Relative Performance YTD
Source: Bloomberg, OIR
Upgrade to OVERWEIGHT
As we had also recently upgraded StarHub from Hold to BUY, we now
have BUY calls on all three telcos; hence, we upgrade our sector
recommendation to OVERWEIGHT. Key risks include a sharper-thanexpected spike in interest rates and further depreciation in the regional
currencies against the SGD (but this affects mainly Singtel). While there
could still be a new entrant coming into the Singapore mobile market, we
think that any impact is likely muted and would probably be felt from
2018 onwards.
Exhibit 9: OIR Recommendations
Stock
Price
Rating
Fair Value
Dividend Yield
MobileOne
S$2.96
BUY
S$3.66
6.3%
SingTel
S$3.85
BUY
S$4.38
4.6%
StarHub
S$3.59
BUY
S$3.96
5.6%
Source: OIR
5
OCBC Investment Research
Singapore Equities
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Important disclosures