Singapore (Feb 21): OCBC is recommending that investors switch out of StarHub and into Singtel given the latter’s diversified and more stable earnings base, and being the only telco whose latest earnings results met the research house’s expectations.
This comes as the research house maintains its “neutral” view on the local telco sector, with a “buy” recommendation for Singtel at a fair value estimate of $4.15, and “sell” for StarHub with a $2.20 fair value.
In a Wednesday report, lead analyst Eugene Chua says the fact that all three listed telcos in Singapore ended CY17 with muted results points to one thing: that is, higher competition in a saturated market translating to underperformances.
See: StarHub posts 74% drop in 4Q earnings to $14.1 mil on higher operating expenses
See: Singtel posts 8.5% decline in 3Q earnings to $890 mil on lower contribution from associates
See: M1 posts 2.5% drop in 4Q earnings to $31 mil on lower handset sales
“Looking ahead, the telecom sector will remain under pressure with the entry of two new Mobile Virtual Network Operators (MVNOs) as well as the impending entry of TPG,” says Chua.
“In a saturated market, we expect mobile ARPUs and broadband ARPUs to decline ahead, translating to weaker service revenue for the telcos. Consequently, while correction of the share prices of the three telcos started since mid-CY16, we believe valuations do not accurately reflect the fundamental outlook of Singtel and StarHub,” he adds.
While StarHub’s forward dividend yield is trading at 1.3sd above the five-year average, Chua says he is currently unconvinced of the telco’s ability to sustain its 4 cents per quarter dividend beyond FY18.
In contrast, he remains positive on Singtel’s longer-term outlook given its focus on growing its cyber security, ICT solutions capabilities, digital advertising and other digital-related businesses.
The analyst further highlights Singtel as the dominant telco in Singapore and also one with the most diversified earnings base. At its last closing price of $3.38, the stock also trading at P/E and EV/EBITDA at 1.9sd below and 1.5sd below their 5-year averages, respectively.
“This disparity in valuations between Singtel and StarHub is tremendously unjustifiable, especially since Singtel has the more resilient earnings outlook, in our view,” comments Chua.
M1 has been given a “hold” rating with a fair value of $1.70.
At its last closing price of $1.80, it is trading at forward P/E and forward EV/EBITDA trading at 0.7sd and 1.2sd below five-year averages, respectively – valuations which Chua deems fair and reflective of the company’s muted outlook.
As at 11.17am, shares in Singtel, StarHub and M1 are trading at $3.39, $2.56 and $1.81 respectively.
