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Singapore Telcos Summary

Core Content and Main Points

The document provides an analysis of the Singapore telco sector, highlighting the positive trends and investment opportunities in the industry. The key telcos—M1, SingTel, and StarHub—are all upgraded to BUY, with the sector weighting raised to OVERWEIGHT. The analysis focuses on the following aspects:

• Data Monetisation: A major growth driver, with more than 50% of postpaid users on tiered data plans. M1 leads with 54%, followed by StarHub (52%) and SingTel (50%). The trend is expected to reach 70% by year-end.
• Handset Subsidies: Declining significantly, contributing to margin improvements. Subsidies for popular models such as Samsung Galaxy, iPhone, and HTC are at the lowest levels seen.
• Data Roaming: Stabilised after a prolonged decline, providing a positive outlook for the sector.
• Mobile Revenue Growth: Postpaid mobile revenue has grown significantly, with M1 showing the strongest performance. Prepaid mobile revenue is declining due to tighter immigration policies and the rise of OTT apps.
• ARPU Trends: Mixed, with M1 showing improvement while SingTel and StarHub's ARPU have been affected by bundle sharing plans. However, core ARPU for StarHub has improved.
• 4G VAS Pricing: Expected to boost ARPU and net profit when promotions end. M1 is anticipated to benefit the most.
• Fixed Broadband and Home Services: Competitive with price cuts and promotions, but corporate fixed broadband is expected to grow.
• Regulatory and Competitive Environment: While Pay TV and home broadband face challenges, telcos are adapting with value-added bundles and content strategies.

Key Information

Telco Upgrades and Target Prices

• M1: Upgraded to BUY with a target price (TP) of SGD4.24 (up 10% from SGD3.86).
• SingTel: Upgraded to BUY with a TP of SGD4.35 (up 21% from SGD3.60).
• StarHub: Upgraded to BUY with a TP of SGD4.87 (down 2% from SGD4.98).

Sector Weighting

• The telco sector is upgraded to OVERWEIGHT due to positive growth trends and potential for earnings recovery.

Investment Preferences

• M1 remains the top choice due to strong mobile growth and potential for higher dividends.
• SingTel is the second preferred, with a recovery in earnings expected and room for re-rating.
• StarHub is the least preferred, though still a BUY due to its low gearing and content strategy.

Positive Trends

• Data Monetisation: Driving mobile revenue growth, especially with the migration to 4G.
• Falling Handset Subsidies: Improving margins and reducing reliance on subsidy-driven revenue.
• Stabilised Data Roaming: A key positive for the sector, reducing concerns over revenue volatility.

Risks

• Network Outages: Possible due to the expansion of services like VoLTE and increased video traffic.
• User Churn: Risk of higher churn if network performance is unstable.
• Acquisition of Shin Corp: A potential risk for SingTel, though the report suggests caution if it materialises.

4G VAS and ARPU Impact

• The end of 4G VAS promotions is expected to boost ARPU and net profit.
• M1 is projected to benefit the most, with an estimated 1.1% boost in net profit for every 100,000 new customers.

Prepaid Mobile

• Prepaid mobile revenue is declining due to reduced foreign worker population and OTT app usage.
• Prepaid revenue accounts for 11-18% of mobile revenue, which is expected to be offset by postpaid growth.

Fixed Broadband

• Corporate Segment: Shows potential for growth, with initiatives in the 2014 budget expected to support SMEs.
• Home Broadband: Intense competition, with price cuts and promotions affecting ARPU, but telcos are focusing on value bundles.

Catalysts for Growth

• Faster Data Monetisation: Especially through video content.
• Rebound in Data Roaming: With new activation and automatic plans.
• Dividend Potential: Low gearing and reduced capex suggest room for higher dividends.

Risks and Concerns

• Pay TV Stalemate: Continued competition and alternatives like OTT and illegal downloads.
• Fixed Broadband Competition: Intense pricing and promotions.
• Regulatory Fines: Potential impact on revenue and profitability.
• Network Stability: Critical for user retention and ARPU growth.

Conclusion

The Singapore telco sector is showing signs of recovery, with data monetisation, falling handset subsidies, and stabilised roaming revenue as key positive trends. M1 remains the top pick due to its strong mobile growth and potential for higher dividends. SingTel is on the path to earnings recovery, and StarHub is still a BUY despite challenges in Pay TV and home broadband. The overall outlook is positive, with the sector upgraded to OVERWEIGHT.