trends, d) cost containment and e) skirmishes in broadband.No surprises expected. We anticipate a fairly uninspiring 2Q where we project

•

their success in curbing, if not improving, their market share erosion which has now

descended near their internal threshold. Thus, we anticipate revenue to decline by

1-2% for 2Q exacerbated by slower roaming, and weaker mobile usage among the

migrant worker segment. We project EBITDA margin declines of 0.5-1% pts on a

qoq basis leading to a net profit contraction of 9-10% sequentially. For StarHub, we

see 2Q revenue declining by a smaller 1-2% relative to 1Q. We think that there

could be multi-faceted threats to topline from its discretionary base which is

arguably more vulnerable to an economic slowdown. In terms of margins, we

believe that there could be some slight pressure on margins owing to promotion

campaigns and potential down trading. Thus, we believe that EBITDA margins

would trend downwards slightly by close to 1% pts leading to net profit contraction

of 5-7% qoq decline. SingTel Singapore should see a 4% qoq revenue rebound in

2Q09, on the back of wireless and wired broadband revenue. EBITDA margins

should fall from the seasonally high 1Q09 of 37.6% to 36% in 2Q as subscriber

acquisition and retention costs rise from its seasonal low.Expectations for operators. For M1, we think the key event would centre around

•

market, we believe that telcos will not outperform the market. Hence, we advise

investors to switch out of telcos into high beta cyclicals and reiterate our Neutral

stance on the sector. That said, dividend yields are a prime downside supporter with

average yields of 4-9% for CY09.Maintain NEUTRAL on the sector. Given our more optimistic outlook on the stock

•

earnings turnaround, exposure to emerging markets and the strengthening regional

currencies. We maintain our OUTPERFORM rating on the stock with a SOP-based

target price of S$3.20. Potential re-rating catalysts include qoq earnings growth

driven by the strong performances of its key associates. We advocate switching out

of StarHub (Underperform, Target price: S$1.54) into SingTel as we believe its

share price will come under pressure when bidding for rights to broadcast the

Barclays Premier League begins in 3Q09.Top pick is SingTel. Our top pick in the sector continues to be SingTel for its

Sector comparisons

Target Core 3-yr EPS P/BV ROE Div

Bloomberg Price price Mkt cap P/E (x) CAGR (x) (%) yield (%)

ticker Recom. (Local) (Local) (US$ m) CY2009 CY2010 (%) CY2009 CY2009 CY2009

SingTel ST SP O 3.16 3.20 34,472 13.5 12.2 8.8 2.3 17.4 4.0

M1 M1 SP N 1.59 1.54 975 9.7 8.9 1.6 5.7 61.8 8.7

StarHub STH SP U 2.16 1.58 2,533 11.4 13.8 1.4 26.8 263.1 8.3

Simple average 11.5 11.6 3.9 11.6 114.1 7.0

O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy and TS = Trading Sell

Source: Company, CIMB-GK Research

[ 2 ]

2Q09 earnings preview

Our expectations for 2Q.

sector revenue growth of 3% and sector EBITDA to be relatively flat on a qoq basis.

Specifically, we see revenues being relatively lifeless owing to stagnating usage

patterns and weakness in pressure points of roaming and IDD. The compensating

factor, however, would be the growth in data services. Cost containment, while an

ever-present theme, will face resistance from normalising subscriber acquisition and

retention cost (SAC) after a seasonally low 1Q09.

Key themes to watch out for in 2Q are: a) normalising SACs, b) weak toplines, c)

market share trends, d) cost containment and e) skirmishes in broadband.We anticipate a fairly uninspiring 2Q where we project

More normalised SACs.

abnormally low SACs post-MNP and b) the strategic initiatives by the respective

operators.We see SACs normalising for two primary factors: i) the

Abnormally low SACs

when SACs ballooned to unsustainably high levels, see Fig 1, which consequently

pushed margins down (Fig 2) to the region of 35-36% from 37-40% mark before. In

response, operators dialled back too aggressively, and in 1QCY09 signalled their

intentions of raising their SACs to more sustainable levels and as a tool for subscriber

acquisition.– We believe that there was an overreaction to the MNP period

Different strategic initiatives

on preserving its market share, after seeing it dwindle down to its internal threshold of

a 25% market share. As a result, we have seen heavier handset subsidies on offer by

M1. Meanwhile, SingTel has been equally pugnacious, as it was armed with a fresh

marketing budget for FY3/10 having recently concluded its financial year end in Mar.

On the other hand, we understand that StarHub was less combative but did offer its

fair share of handset subsidies in 2Q.– In its 1Q conference call, M1 signalled that it was intent

Figure 1: SACs (S$)

0

50

100

150

200

250

300

350

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

SingTel StarHub M1

Source: Company, CIMB-GK Research

Figure 2: Sector EBITDA margins (%)

30.0%

32.0%

34.0%

36.0%

38.0%

40.0%

42.0%

44.0%

1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Source: Company, CIMB-GK Research

[ 3 ]

Cost containment.

resistance from normalising SACs levels. However, we believe that most of the

operators have factored this into their guidance for FY09. To recap, SingTel

Singapore is guiding for EBITDA margins to decline to the 36-38% for FY3/10 from

37.3% in FY09. StarHub upped its service EBITDA margin guidance to 32% (from its

earlier guidance of 31%) for FY09 vs 31.7% in FY08. M1 believes that operations will

remain stable in FY09.While the emphasis on cost containment remains, it will face

Weak toplines.

usage patterns and lower roaming and IDD usage, which leads us to believe that 2Q

revenues may be fairly pedestrian. We anticipate that sector revenues would grow in

the order of 3% on a qoq basis. That said, there should be some support from nonvoice

services especially in wired and wireless broadband, an area where all telcos

have been actively pinpointing to stave off weakness in their bread-and-butter voice

services. We believe that in 1Q09, wireless broadband made up about 5% of

StarHub’s total revenue, 8% to M1’s total revenue and 3% to SingTel’s revenue.The economy continues to wreak havoc on toplines causing stagnant

How will market share shift?

of the three operators. M1 has already trumpeted its plans on defending its market

share having seen it descend to its internal threshold of 25% (Fig 3). However, they

stand at a disadvantage vis-à-vis their two larger rivals given their single product focus

and inability to offer bundling options.

But the overriding theme in the jostling for market share is the game-changing

NGNBN where competition and new players would be introduced. Unsurprisingly, we

believe that operators are keen to lockdown their higher-value subscribers and poach

other subscribers before this new paradigm emerges. As a consequence, we have

seen more aggressive handset subsidies, more attractive bundling promotions and

various initiatives on the broadband front.A keen area of focus will be the shifting market shares

Skirmishes in broadband.

skirmishes in broadband, more on the wired broadband variety. We believe this

supports our thesis that retail broadband pricing is bound to come under pressure

ahead of the NGNBN rollout. We also think that operators are looking to tap into the

pent-up demand for wireless broadband given the proliferation of smartphones and

notebooks and the fairly mobile society present in Singapore. Some of the key prepaid

wireless broadband and other broadband initiatives launched in 2Q are:Throughout the quarter, there had been rather aggressive

•

usage for a period of 3-days for S$18 at speeds of up to 7.2 Mbps. On the fixed

broadband side, M1 provided heavier discounts for its 15 Mbps, 30 Mbps and 100

Mbps plan.In Apr, M1 launched Singapore’s first wireless broadband product, offering unlimited

•

variant, offering speeds of either 2 Mbps or 7.2 Mbps. It offered various rates

including an hourly rate, a daily rate, a 3-day rate, and a five-day rate.StarHub then followed up in May by offering its own prepaid wireless broadband

•

dropped the 8 Mbps plan in favour for a 6 Mbps one at slightly lower cost and

introduced a new higher end 15 Mbps plan.For SingTel, it raised its pricing for its fixed broadband product on the 3 Mbps plan,

Figure 3: Subscriber market share (%)

20%

25%

30%

35%

40%

45%

50%

1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

SingTel StarHub M1

Source: Company, CIMB-GK Research

[ 4 ]

Preview of the operator’s 2Q performance

M1.

not improving, their market share erosion which has now descended near their

internal threshold. Concomitantly, being a mobile-centric player, the loss in

subscribers has a more direct impact to top line. Therefore, we anticipate that revenue

would contract by 1-2% qoq for 2Q, exacerbated by slower roaming and mobile

usage. However, there should be some alleviation stemming from moves to contain

market share loss and focus on non-voice services. Meanwhile, we believe that

EBITDA margins could take a slight hit, owing to more intensive subscriber acquisition

efforts. We project EBITDA margin declines of 0.5-1% pts leading to a net profit

contraction of 9-10% on a qoq basis.For M1, we think the key event would centre around their success in curbing, if

StarHub.

to 1Q. We think that there could be multi-faceted threats to topline from its

discretionary base which is arguably more vulnerable to an economic slowdown and

its relatively less intense marketing campaigns. In terms of margins, we believe that

there could be some slight pressure on margins owing to promotion campaigns and

potential down trading. Hence, we believe that EBITDA margins would trend

downwards slightly by close to 1% pts leading to net profit contraction of 5-7% on a

qoq basis.In StarHub’s case, we see 2Q revenue declining by a smaller 1-2% relative

SingTel Singapore

2Q09, on the back of wireless and wired broadband revenue. EBITDA margins should

fall from the seasonally high 1Q09 of 37.6% to 36% in 2Q as subscriber acquisition

and retention costs rise. Also, increasing contributions from SCS’s lower-margin IT

revenue should also dilute margins.

We will preview SingTel’s results separately.. SingTel Singapore should see a 4% qoq revenue rebound in

Figure 4: 2QCY08 estimates for StarHub and M1

2QCY09

Projections

(S$m)

1QCY09

actual (S$m)

qoq

growth

(%)

2QCY08

actual

(S$m)

yoy

growth (%)

Revenue

StarHub 525 531 -1.1% 531 -1.1%

M1 185 186 -1.0% 205 -10.1%

EBITDA

StarHub 163 168 -3.0% 147 10.9%

M1 75 76 -2.1% 77 -2.5%

EBITDA margins (%)

StarHub 31.0% 31.6% 27.7%

M1 40.5% 40.9% 37.3%

Core net profit

StarHub 78 82 -4.9% 64 21.9%

M1 33 36 -8.8% 34 -3.5%

Source: Company, CIMB-GK Research,

Valuation and recommendation

Maintain Neutral on the sector.

market, we believe that telcos will not outperform the market. Hence, we advise

investors to switch out of telcos into high beta cyclicals and reiterate our Neutral

stance on the sector. That said, dividend yields are a prime downside supporter with

average yields of 4-9% for CY09.Given our more optimistic outlook on the stock

SingTel is our top pick.

earnings turnaround and exposure to emerging markets. We maintain our

OUTPERFORM rating on the stock with a SOP-based target price of S$3.20. Potential

re-rating catalysts include qoq earnings growth driven by the strong performances of

its key associates.Our top pick in the sector continues to be SingTel for its

Switch out of StarHub to SingTel.

price: S$1.54) into SingTel as we believe its share price will come under pressure

when bidding for rights to broadcast the 2010-12 seasons of the Barclays Premier

League begins in 3Q09Switch out of StarHub (Underperform, Target

That is a attractive price. So the down is due to analyst downgrade. Anyway all defensive stock did not perform...basically yesterday. I thk even today also.

Btw will be interesting to see how Starhub progress. Looking at the chart, the uptrend progress for it currently still looks possible. Monitor for a while first.... see if there is any changes in the signal.

Analyst news sometime is really an impact...haha