Wednesday, May 21, 2008

TeleCommunication Sector - CIMB

Margin concerns overshadow consumption growth optimism. EBITDA margin
compression in 1QCY08 exceeded our expectations and Singapore telcos are now
in unchartered waters with sector EBITDA margin at an all-time low of 34.6%. We
believe that the systemic margin pressure exerted by SingTel is unlikely to ease
soon and will overshadow telco service consumption growth in Singapore. Sector
PBT growth is set to slow to 8% for 2008-09 as a result, down from 10% previously.
1QCY08 results review. SingTel’s market-share drive took its mobile subscriber
share to 43%, the highest in 17 quarters. This came at the expense of sector
EBITDA margin, which was driven down to 34.6% (-280bp yoy). StarHub was forced
to respond to an aggressive SingTel, resulting in its sharpest EBITDA margin
erosion (-200bp yoy) to date. M1 averted yoy EBITDA margin erosion with the help
of a low base from heavy 10th anniversary promotions the year before.
Will SingTel’s aggression ease soon? We would not bet that competition will
ease once mobile number portability (MNP) comes on stream. We believe SingTel
is in the midst of a strategic repositioning ahead of the rollout of a national
broadband network and the push for market share could be extended. Market share
offers SingTel the scale of return for strategic growth initiatives/investments e.g. pay
TV content, upgrade of fixed network, new wireless services. This sets SingTel up
to generate potentially better returns for future investments relative to StarHub and
Yields offer respite for StarHub and M1. StarHub and M1 continue to offer
prospects of more than 8% yields on robust free cash flow. Earnings risk should be
limited by SingTel’s EBITDA margin guidance of 40% (flat yoy) for FY09, which
suggests that sector margins could stabilise during the course of the year. However,
we do not expect a significant margin recovery in 2008-9.
• Maintain Neutral on the sector. In the current environment of increased
competition within Singapore, SingTel’s diversified earnings base offers better
downside protection than its peers. Singapore is only 30% of its earnings versus
100% for M1 and Starhub. It also has potential near-term re-rating catalysts from
the MTN acquisition with Bharti. Between Starhub and M1, we prefer StarHub over
M1 for its more diversified earnings. As a dividend yield hideout, our strategist
prefers Media and S-REITs, over Singapore Telcos. Among regional telcos, our
preference is for TM International.

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