Telecoms Sector - OCBC Investment 2015-11-30: Maintain OVERWEIGHT in uncertain times

STARHUB LTD CC3.SI SINGTEL Singapore Telecommunications Z74.SI M1 LIMITED B2F.SI

Telecoms Sector: Maintain OVERWEIGHT in uncertain times

 Yields largely recovered above 5%

 Defensive businesses, strong cashflows

 M1 has the highest expected total return

For nearly a year, the market has been rife with talk of a fourth telco emerging to increase competition here. However, we understand that the IDA is only likely to give its decision in early 2016.

While we have seen keen interest from two companies, industry watchers believe that a new entrant would still face a pretty uphill task in getting its network in place as well as garner enough meaningful market share.

Besides the threat of a new entrant, the traditional mobile services segment is also facing increased competition from OTT (over-the-top) apps like Whatsapp, Facebook Messenger. However, it is a structural change that affects all telcos; and one solution is to embrace this and work directly with some of these OTT apps to offer value-added services.
And over in the Pay TV space, OTT operators like Netflix are also looking to move into the market directly. However, due to the diverse cultural mix here, it may be harder to “cut the cable” and rely solely on these OTT providers.
Meanwhile, the telcos here are also upping their game by being OTT providers themselves, thus further reducing the threat.

With telcos largely seen as defensive plays with stable dividend yields, the threat of rising interest rates would definitely erode their attractiveness.
While the US Fed has signaled its intention to hike rates as early as Dec, some market watchers remain unconvinced if there is even scope for a rate hike, much less a series of hikes, given the weakening economic outlook around the globe.

Last but not least, it has to be said that the SG telcos were among some of the very few companies that recently reported 3Q results that did not disappoint; and in these more uncertain times, their defensive earnings and strong cashflow generation would be even more important. Hence we opt to keep our OVERWEIGHT rating on the sector, supported by relatively decent yields of nearly 5%.

Carey Wong OCBC Securities | http://www.ocbcresearch.com/ 2015-11-30

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