Telecom sector: Downgrade to "neutral" - BT Invest

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21 May 2013 ... M1's core earnings met 27% of our full-year forecast; ... As such, we downgrade our rating on the sector to ... Singapore | Telecom Sector.
Singapore | Telecom Sector

Asia Pacific Equity Research

TELECOM | NEUTRAL 21 May 2013 Sector Update

DOWNGRADE TO NEUTRAL • • •

All largely in line Outlook still muted Downgrade to NEUTRAL

NEUTRAL (downgrade) Analysts Carey Wong (Lead) ● +65 6531 9808 [email protected] Andy Wong ● +65 6531 9817

Results were mostly in line All three telcos reported 1QCY13 results that came in within our expectations. M1’s core earnings met 27% of our full-year forecast; SingTel met 27%; and StarHub met 25%. StarHub declared a quarterly dividend of S$0.05/share as guided, while SingTel declared a final dividend of S$0.10 (bringing its total dividend for FY13 to S$0.168). Review of Singapore mobile operations Core post-paid mobile subscribers grew by 1.2% QoQ to 4.3m at endMar , led by SingTel (+1.4%), M1 (+1.1%) and StarHub (+0.8%). While monthly ARPUs were fairly stable, the three telcos expect to see some uplifts this year, aided by the new tiered pricing plans with less generous data bundles; they also expect data usage to trend higher as more users migrate to the faster 4G networks. Outlook still quite muted this year While the exception of M1, which expects to see a moderate earnings growth this year and pay out at least 80% of earnings as dividends, both SingTel and StarHub are more muted in their outlook. SingTel expects stable group revenue for FY14 while overall EBITDA should show low single-digit growth. It did raise its dividend payout ratio to 60-75% of core earnings. On the other hand, StarHub has pared its revenue guidance down to low single-digit growth from single-digit growth and kept its EBITDA margin at 31%. It also kept its dividend at S$0.20/share, or S$0.05/quarter. Downgrade to NEUTRAL - yields are not attractive In the search for yield, telco stocks have done very well, rising some 14-26% YTD. However, we note that the share prices have run up too much, too quickly, and this has driven yields down to below 5%. In addition, a more “risk-on” approach could see investors switching out of defensive plays. As such, we downgrade our rating on the sector to NEUTRAL from Overweight.

Please refer to important disclosures at the back of this document.

[email protected] Relative total return

1m

3m

12m

Sector (%)

9

13

37

STI-adjusted (%)

3

7

9

Price performance chart 1050

Sect or I ndex Lev el

M ar ket I ndex Lev el 3900

969

3580

888

3260

807

2940

727

2620

646 M ay-12

2300 A ug-12

Nov-12 FST T C

Feb-13

M ay-13 FSST I

Sources: Bloomberg, OIR estimates

Stock coverage ratings BBRG Ticker

Price

M1 SP Equity ST SP Equity STH SP Equity

3.42 4.07 4.34

Fair Value 3.10 3.83 4.00

Rating HOLD HOLD SELL

MICA (P) 041/06/2012

OCBC Investment Research Singapore Equities

Exhibit 1: Summary of 1QFY13 Results Mar 13 Quarter (S$ m)

M1

SingTel*

StarHub

Operating Revenue

243

1688

580.1

EBITDA

78.9

529

182.1

Net Profit

41

271

91.2

39.50%

31.30%

33.30%

Service EBITDA Margin

Note: SingTel revenue shows only Singapore telco business Source: Companies, OIR

Exhibit 2: Post-Paid Subscriber Growth

5000 4500 4000 3500 3000

3.0%

2500 2000 1500 1000 500 0

1.5%

2.5% 2.0%

1.0% 0.5%

Total Postpaid Subs

Mar-13

Jun-12

Sep-11

Dec-10

Mar-10

Jun-09

Sep-08

0.0%

QoQ Grow th

Source: Companies, OIR

Core post-paid mobile subscribers grew by 1.2% QoQ to 4.3m at end-Mar, led by SingTel (+1.4%), M1 (+1.1%) and StarHub (+0.8%). But with the mobile penetration already above 150%, we believe that subsequent growth is likely to slow further from here.

2

OCBC Investment Research Singapore Equities

Exhibit 3: Post-paid Mobile Market Share Dynamics

44.7%45.8%46.5% 44.7%45.6%45.9%45.9%46.2%46.3% 48.3% 46.9%47.0%47.6%47.6% 46.0%45.8% 44.8%

48.2% 48.4%

27.5% 30.4%27.8% 28.1%28.3%28.1%28.1% 27.3% 28.4%28.3%28.2%27.8% 28.4%29.2% 29.6% 29.4% 28.7% 29.1 % 30.4%

25.8%25.6% 26.4%26.1%26.7%26.5%26.1%26.0%25.9%25.9%25.8% 26.1%27.2% 26.8%26.5%26.0%26.4%26.5%26.5%

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

M1

Mar-11

StarHub

Sep-11

Mar-12

Sep-12

Mar-13

SingTel

Source: Companies, OIR

Little change in status quo, as SingTel continues to lead with a 48.4% share of the post-paid market, followed by StarHub (27.3%), then M1 with 25.6%.

Exhibit 4: Monthly Churn Rates

1.8% 1.7%

1.7% 1.6%

1.6% 1.5%

1.5% 1.4%

1.0% 1.0%1.0% 1.2% 1.1% 0.9% 1.1%

1.5% 1.4%

1.4%

1.3% 1.3% 1.2% 1.2%1.2% 1.1% 1.1%1.1% 1.3%

0.9%0.9%0.9%0.9%

1.0% 0.9%

1.0%

Mar-09

1.0%

1.1%

1.0%

0.9%

0.8%0.8%0.8%

1.3% 1.2% 1.3% 1.3% 1.1%

1.2%

1.1% 1.0%

Sep-08

1.3%

1.0% 0.9%

0.9% 0.9%0.9%

0.8%0.8%

Sep-09

Mar-10 StarHub

Sep-10

Mar-11 M1

Sep-11 SingTel

Source: Companies, OIR

3

Mar-12

Sep-12

Mar-13

OCBC Investment Research Singapore Equities

Exhibit 5: Post-paid ARPU Trends $92 $89

$88 $86 $83

$84 $85

$89 $88

$87 $87

$86

$85

$86 $82

$80 $80 $81 $78

$77

$76 $74

$72 $73 $72 $73

$71 $69 $69

$70

$69

$74 $71

$70

$69

$69

$70

$67 $62

$62 $59

$61 $60 $61 $60 $60 $60 $60

$54 $53 $53 $53 $53

$59

$53

$56 $55 Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

StarHub

Mar-11 M1

Sep-11

Mar-12

Sep-12

Mar-13

SingTel

Source: Companies, OIR

While monthly ARPUs were fairly stable, the three telcos expect to see some uplifts this year, aided by the new tiered pricing plans with less generous data bundles. They also expect data usage to trend higher as more users migrate to the faster 4G networks; this could lead more people to exceed their data caps, thus resulting in higher ARPUs.

Exhibit 6: Broadband Growth and ARPU Trends

('000)

(S$)

600

80 70

500

60 400

50

300

40 30

200

20 100

10

0

Sep-08

Jun-09

StarHub Users (LHS)

Mar-10

Dec-10

SingTel Users (LHS)

Sep-11 StarHub ARPU(RHS)

Source: Companies, OIR

4

Jun-12

Mar-13 SingTel ARPU(RHS)

OCBC Investment Research Singapore Equities

On the broadband front, we note that ARPUs for SingTel fell 7% QoQ and StarHub 2%. Increased competition in the NBN (fibre) space could be behind the fall. As some RSPs (Retail Service Providers) are already offering the basic 100Mbps service for S$39/month, there may still be room for ARPUs to fall. SingTel looks vulnerable to a steeper ARPU fall as more of its existing ADSL customers migrate to fibre.

Exhibit 7: Pay TV Growth and ARPU Trends

600

60 55

500 404 400 300

398 530 535 539 541 541 537 538 542 544 542 545 544 543 541 536 532

200 101

100

126

155

191

220 245

264

292 313 335 353

368 380 391

50 45 40 35 30 25 20

0 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 StarHub ('000)

SingTe ('000)l

StarHub ARPU (S$)

SingTel APRU (S$)

Source: Companies, OIR

Over in the Pay TV space, SingTel’s mio-TV continued to add subscribers, gaining nearly 6k more, while StarHub lost 4k customers in the Jan-Mar quarter. However, StarHub could potentially regain some lost ground if it does get to carry the BPL (Barclays Premier League) content on its boxes for the 2013-2016 seasons under the mandatory Cross-Carriage ruling for exclusive content. But SingTel has lodged an appeal against MDA’s ruling on grounds that it has secured the BPL content on a non-exclusive basis.

Exhibit 8: Updated Guidance after 1QCY13 Results Company

Latest Guidance

M1

Expects moderate growth in earnings Capex around S$130-150m Dividend payout of at least 80% of net profit

SingTel

Low single-digit growth for SG ops; stable EBITDA margin SG capex ~S$950m Dividend payout of 55-70% of underlying net profit

StarHub

Expects low single-digit revenue growth; 31% service EBITDA margin Capex around 13% (vs. 11% in FY12) of operating revenue Dividend target of S$0.20/share, or S$0.05 per quarter

Source: Companies, OIR

5

OCBC Investment Research Singapore Equities

While the exception of M1, which expects to see a moderate earnings growth this year and pay out at least 80% of earnings as dividends, both SingTel and StarHub are more muted in their outlook. SingTel expects stable group revenue for FY14 while overall EBITDA should show low single-digit growth. It did raise its dividend payout ratio to 60-75% of core earnings. On the other hand, StarHub has pared its revenue guidance down to low single-digit growth from single-digit growth and kept its EBITDA margin at 31%. It also kept its dividend at S$0.20/share, or S$0.05/quarter.

Exhibit 9: Recommendation Price

Our Rating

Fair Value

Div Yield

M1

S$3.42

HOLD

S$3.10

4.3%

SingTel

S$4.07

HOLD

S$3.83

4.2%

StarHub

S$4.34

SELL

S$4.00

4.6%

Source: OIR

In the search for yield, telco stocks have done very well, rising some 14-26% YTD, versus the STI’s 9% climb. However, given the still-muted outlook, we believe that the share prices have run up too much, too quickly, and this has driven yields down to below 5%. While these yields are still fairly decent, they are not compelling on a historical basis. In addition, a more “risk-on” approach could see investors switching out of defensive plays. As such, we downgrade our rating on the sector to NEUTRAL from Overweight.

6

OCBC Investment Research Singapore Equities

SHAREHOLDING DECLARATION:

The analyst/analysts who wrote this report holds/hold shares in Singapore Telecoms.

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