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Singapore Telcos Summary

Core Content

The document provides an analysis of the Singapore telco sector, focusing on the performance and outlook of M1, StarHub, and SingTel. It highlights the key messages from a joint marketing trip in Kuala Lumpur with 13 clients, emphasizing the investment strategy for the telcos in 2014 and beyond.

Main Points

1. Investment Recommendations

• M1 and StarHub: Clients were in favor of continuing to buy these telcos due to their potential for higher dividends and benefits from data monetization.
• SingTel: A more cautious view was expressed, with the suggestion that investing directly in SingTel's listed associates like Bharti might be more beneficial than indirect investment through SingTel.

2. Dividend Potential

• M1: Has the potential to pay more special dividends due to the acceleration in tiered data subscriptions and a high percentage of heavy data users.
• StarHub: Offers a healthy balance sheet, making it a good candidate for increased dividends, especially after the 4G spectrum payment and MediaHub construction.
• SingTel: Has the lowest proportion of postpaid users on tiered plans and the lightest data users, limiting its dividend potential. It is currently at 1.0x net debt/EBITDA, with no room for dividend increases.

3. Long-Term Outlook

• The telcos face challenges due to declining voice and SMS revenue, primarily from OTT apps like WhatsApp, LINE, WeChat, KakaoTalk, and Skype.
• New services such as HD voice and joyn (Rich Communication Services) are part of the solution but are seen as just pieces of a larger puzzle that needs time to mature.
• Telcos must leverage technological changes like Voice over LTE (VoLTE) to provide alternatives to OTT services and reinvent themselves as solution or content providers.

4. Dealing with OTT Threat

• Fight: Advocating for regulatory changes to charge OTT providers for network usage, but this is seen as high risk and costly.
• Imitate: Launching HD voice and joyn services to compete with OTT, which can provide better quality and more reliable services.
• Partner: Collaborating with OTT providers to offer bundled services, which can generate additional revenue and attract users.

5. Market Performance

• M1 and StarHub are the only telcos with a rising ARPU trend, while SingTel has a declining trend.
• M1 has the highest percentage of postpaid users on tiered plans and heavy data users, which is expected to drive its growth.
• StarHub has the second-highest percentage of postpaid users on tiered plans and a decent percentage of heavy data users.

6. Financial Metrics

• M1 and StarHub have lower gearing and higher room for dividend increases compared to SingTel.
• SingTel has a higher net debt/equity ratio, limiting its ability to raise dividends.
• StarHub has a higher free cash flow yield and is more likely to improve its dividend policy in FY15E.

Key Information

• M1 and StarHub are recommended for investment due to their potential for higher dividends and better data monetization opportunities.
• SingTel is advised against due to its conservative approach and limited room for dividend increases.
• The threat from OTT apps is significant, but telcos have options to counteract this through imitation and partnerships.
• VoLTE and joyn are key technologies that can help telcos compete with OTT services by offering better quality and reliability.
• StarHub is currently the only telco in Singapore offering HD Voice, which gives it a competitive advantage.

Strategy for 2014

• Buy M1 and StarHub for their potential to pay higher dividends and benefit from data monetization.
• Avoid SingTel due to its limited room for dividend increases and the risk of corporate actions affecting returns.
• Focus on telcos that can adapt to technological changes and offer more than just connectivity services.

Conclusion

The analysis concludes that M1 and StarHub are the most promising telcos for investment in 2014, with a focus on their ability to generate higher dividends and adapt to the changing market. SingTel is viewed with caution due to its limited financial flexibility and the potential risks associated with its corporate structure. The telcos must continue to innovate and adapt to OTT threats by leveraging new technologies and forming strategic partnerships.