SINGAPORE (Nov 23): OCBC Research is remaining “neutral” on Singapore’s telco sector as it anticipates a decline in average revenue per user (ARPU) by 14-20% over the next years while TPG secures mobile revenue market share of about 6% by 2021.
In a Thursday report, lead analyst Eugene Chua notes that Singapore’s telcom sector has been underperforming the STI Index since the FTSE Straits Times Telecommunciations Index (FSTTC) started to diverge in March.
While all three telcos reported weaker earnings over the latest financial quarter, the research house is reiterating its “buy” call on Singtel with a fair value of $4.19, highlighting the stock as its top pick which is supported by a forward dividend yield of 5.5%.
See: Singtel 2Q earnings treble on NetLink divestment gains; declares special dividend of 3 cents/share
“We are positive on Singtel’s longer-term outlook given its growing presence in the digital space – cyber security, data analytics and digital marketing, all of which we believe are industries with high growth potential as Singapore transforms towards a digital economy. We also see limited downside to Singtel’s near-term dividend payout with the $2.3 billion cash received recently from the IPO of NetLink Trust,” says Chua.
Meanwhile, OCBC maintains its “hold” call on M1 with a fair value of $1.65 with a forward dividend yield of 6.9%, in spite of the telco’s significant exposure to the Singapore mobile market.
This comes as the research house believes the market has largely priced in expectations of declining yields for M1 over the next few years as the telco’s earnings decline assuming its payout ratio is maintained at 80%.
See: M1 posts 4.9% decline in 3Q earnings to $32.7 mil
Chua is also negative on StarHub -- with a “sell” rating, 5.5% forward dividend yield and fair value of $2.30 -- as it is highly exposed to the domestic market.
“We would look to review our assumptions again once we see more consistent growth and contributions from its enterprise segment. Recall that 3Q17 results already gave some indications that its enterprise segment, which Starhub had invested heavily into over the past few years, is starting to gain traction,” explains the analyst.
See: StarHub's 3Q earnings down 11.5% to $76.2 mil
“With heavy capital expenditure at its tail-end, free cashflow may not decline even as earnings fall. This allows StarHub to possibly maintain its dividend of 4 cents per quarter, even beyond FY17. That said, for now, we prefer to wait for clarity as its mobile business remains under pressure,” he adds.
As at 11.34am, shares in Singtel and M1 are trading flat at $3.70 and $1.77 respectively, while StarHub is down by 2 cents at $2.83.
