SINGAPORE (Sept 25): CIMB Research is upgrading its rating on the Singapore telco sector to “neutral”, from “underweight” previously, as the worst appears to be over – for now.
M1, StarHub and SingTel have seen their share prices fall over the past 12 months by 26%, 24% and 7%, respectively.
“These stocks have significantly underperformed the Straits Times Index’s 13% rise over the same period,” says CIMB lead analyst Foong Choong Chen in a report on Sept 22.
According to Foong, this was due to fear of increased competition after the entry of fourth mobile operator TPG Telecom, as well as the weak earnings performance.
While the telcos are expected to be hit by an increase in per unit subsidies as well as higher handset subsidies in 4Q17 and 1Q18 due to strong demand for Apple’s new iPhone 8 and iPhone X, Foong says these will be more than offset by higher revenues on the back of a hike in monthly subscription fees.
“Beyond 1Q18F, we should start to see the positive earnings effects once the immediate impact from high handset subsidies diminishes,” Foong says.
With TPG now expected to launch only at the end of 2018, Foong expects that any negative impact on earnings for the three incumbent telcos will only be felt from FY19.
Following the de-rating of its share prices, CIMB is upgrading M1 and StarHub to “hold”, from “reduce” previously.
“The current share prices of M1 and StarHub are now very close to our target prices (at $1.80 and $2.50, respectively),” says Foong. He adds that the share prices now better reflect the risk of more competition from TPG.
Meanwhile, CIMB is keeping its “add” call on SingTel with an unchanged target price of $4.10.
“Singtel is our preferred Singapore telco pick,” says Foong. “A potential re-rating catalyst is the declaration of a special dividend in the upcoming 2QFY18 results, following the recent IPO of NetLink Trust.”
As at 1.18pm, shares in M1 are trading 3 cents higher at $1.81, shares in StarHub are trading 4 cents higher at $2.64, and shares in SingTel are trading 1 cent lower at $3.67.
These imply expected FY17 P/E of 11.4x for M1, 15.4x for StarHub, and 15.8x for SingTel, as well as forecasted FY17 dividend yields of 7.0%, 6.2%, and 4.8%, respectively.
