Telecommunications Sector - UOB Kay Hian 2015-10-02: Defensive Strength Verified

Telecommunications Sector - UOB Kay Hian 2015-10-02: Defensive Strength Verified Telecommunications Sector M1 LIMITED B2F.SI  SINGTEL Z74.SI  STARHUB LTD CC3.SI 

Telecommunications Singapore – Defensive Strength Verified 

  • Our study on share price performance indicates that telcos have a 73% chance of outperforming the MSCI Singapore Index during a recession. The average quantum of outperformance per quarter during recessions was 3.2% for M1, 3.8% for StarHub and 5.9% for Singtel. 
  • Our study verifies that the sector indeed possesses defensive strength. 
  • Re-iterate BUY for Singtel and M1. Maintain OVERWEIGHT. 


WHAT’S NEW 

  • There is downside risk for the global economy arising from a slowdown in emerging countries, especially those reliant on the export of commodities. Currencies of many emerging countries have already weakened in anticipation of the Federal Reserve tightening monetary policy and hiking interest rates. This is further exacerbated by the slowdown in China, which exerts downward pressure on commodities prices. 
  • Dating recessions. A technical recession occurs when an economy suffers two consecutive quarters of qoq contraction. We have identified four recessions over the past 20 years, namely the Asian financial crisis, 911 terrorist attack, SARS outbreak and the global financial crisis (GFC). Most recessions lasted for two consecutive quarters, except for the SARS outbreak which lasted for three consecutive quarters. 
  • Telcos outperformed during crises. M1 outperformed in three out of four quarters during the past two recessions (probability: 75%). StarHub has a shorter history as it was only listed in Oct 04. The stock outperformed in both quarters during the GFC (probability: 100%). Singtel has the longest history and outperformed in six out of nine quarters during the past four recessions (probability: 67%). On average, telcos have a 73% chance of outperforming the MSCI Singapore Index during a recession. The average quantum of outperformance per quarter during recessions was 3.2% for M1, 3.8% for StarHub and 5.9% for Singtel. 
  • GFC is an ideal case study as it was a recession triggered by external crisis, occurring when economies and financial markets were globalised and highly interconnected. 
  • Operating performance during GFC. Telcos recorded positive net additions and post-paid mobile subscribers increased on a yoy basis during the GFC. However, post-paid ARPU declined 5-15% yoy due to lower contributions from roaming as a result of cutbacks on travelling for both business and leisure. Telcos experienced single-digit declines in service revenue and EBITDA during the GFC. StarHub, led by ex-CEO Terry Clontz, gained market share during the GFC. 

ACTION 


 Staying OVERWEIGHT on the defensive telco sector. 

  • We started the year with many investors complacent about the impact from the potential entry of a fourth mobile operator. Share prices have subsequently experienced massive corrections while, concurrently, the risk of disruption from a fourth mobile operator has diminished. Our preferred BUYs for the sector are Singtel and M1. 

M1 (Upgrade to BUY/S$2.85/Target: S$3.26) 

  • M1 has been able to bundle mobile with fibre broadband and home fixed voice lines since 2010. M1 is able to overcome its handicap of not having a pay-TV business by bundling multiple services or multiple mobile lines. 
  • M1 has suffered the brunt of the recent market correction and will rebound most strongly if there is no fourth mobile operator. The stock provides the most attractive free cash flow yield of 6.3%. 

StarHub (HOLD/S$3.50/Target: S$3.50) 

  • StarHub has enhanced its bundled offerings with the launch of HomeHub Go, which provides five services comprising mobile, fibre broadband, mobile broadband, fibre TV and a home phone line, at an affordable entry price of S$128.80. 
  • Free cash flow yield is less attractive at 5.4%, given that the recent share price correction is relatively mild. Management is committed to paying dividends of 5 cents/quarter or 20 cents/year, which provide an attractive dividend yield of 5.6%. Entry price is S$3.20. 

Singtel (BUY/S$3.60/Target: S$4.56) 

  • Singtel benefits from growth at its regional mobile associates Telkomsel, Bharti Airtel, Advanced Info Service and Globe Telecom. In particular, Telkomsel and Bharti Airtel have registered data revenue growth of 45% and 67% yoy respectively. 
  • Singtel offers the most favourable risk-reward trade-offs based on historical trading range for PE and EV/EBITDA. The stock is the least vulnerable to reversal of yield compression as its yield spread of 1.35% is above the long-term mean of 0.96%. 

SECTOR CATALYSTS 

  • Investors buying into telcos as a defensive shelter. 
  • Dividend yields have recovered after share price correction. 

ASSUMPTION CHANGES 

  • We have revised our target prices based on scenario analysis. 

RISKS 

  • Entry of a fourth mobile operator who uses low pricing to win market share.


Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-02
UOB Kay Hian SGX Stock Analyst Report BUY Upgrade HOLD 3.26 Same 3.26
BUY Maintain BUY 4.56 Same 4.56
HOLD Maintain HOLD 3.50 Same 3.50


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