OCBC Investment 2015-08-28: Telecom Sector - Upgrading to OVERWEIGHT.

Singapore Telecom Sector

UPGRADING TO OVERWEIGHT

 Defensive business as usual

 Interest rate concerns overdone?

 Yields are pretty decent now

For the Jun quarter, the three telcos reported results that were mostly in line with our expectations. Although StarHub’s 2Q15 earnings were also in line, it had a weaker-than-expected 1Q15; but with margins likely to hold up, we think it should do better in 2H15. And as expected, the three telcos have kept their guidance unchanged for the year.

Overall mobile market continues to remain stable, with post-paid subscribers inching up another 0.8% QoQ; monthly post-paid ARPUs were also steady. And with 4G subscribers now making up 68% of all mobile subscribers here, it comes as no surprise that the three telcos are optimistic about rising data usage and further improvements in ARPUs. Hence even in an increasingly uncertainty economic environment, we believe that the main mobile business should do relatively well; although we could see a drop in roaming income.

Recently, we have seen the prices of the telcos correcting quite sharply, spooked by concerns of rising interest rates. However, with the recent global market turmoil, coupled with the devaluation of the CNY against the USD, the odds for a rate hike in Sep seem to have dropped; some market watchers also believe that the quantum of hike has also been reduced. As such, we believe that the current yields have reached pretty attractive levels.

As we had also recently upgraded StarHub from Hold to BUY, we now have BUY calls on all three telcos; hence, we upgrade our sector recommendation to OVERWEIGHT.
Key risks include an unexpected spike in interest rates and further depreciation in the regional currencies against the SGD, but this affects mainly Singtel.
While there could still be a new entrant coming into the Singapore market, we think that any impact is likely muted and would probably be felt from 2018 onwards.

Carey Wong | http://www.ocbcresearch.com/ OCBC Investment Research 2015-08-28

BUY Maintain BUY 4.38 Same 4.38

BUY Maintain BUY 3.66 Same 3.66

BUY Upgrade BUY 3.96 Same 3.96