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3 Catalysts For Telcos In 2014
Perspective | 16 December 2013
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By: Peter Ng
Articles (81) Profile

In spite of the mounting fears since the announcement of quantitative easing (QE) tapering in June which has erased all gains made by the Straits Times Index this year as at 11 December 2013, there appears to be a small handful of sectors that have been more resilient to this volatility, particularly the telecommunications sector in Singapore.

Price Performance Of The Straits Times Index And Telcos

Source: FactSet, Figures Accurate As Of 11 December 2013

Overall, the telecommunications sector has registered an average gain of 11.2 percent in price performance since the start of 2013, while the STI has fallen 2.6 percent. The stellar performance was in light of the sector’s defensive nature, prompting investors to protect their portfolios by investing in these companies’ stocks, in view of the uncertain global economic climate.

Notwithstanding the compressed dividend yield due to the share price rally in these telecommunications companies (telcos), the sector still possesses catalysts which can potentially propel its positive performance thus far into 2014.

Subsidies Down For Mobile Devices
Mobile devices subsidies revealed mixed trends, implied subsidies for the iPhone and Samsung Note devices were down from six months ago, while subsidies for the Samsung Galaxy S4 were up approximately 18.2 percent to $660 per device.

Subsidies For Mobile Devices In 2014

Mobile Phone Subsidies Between The Telcos Source: Deutsche Bank Market Research

Despite the increase in subsidies for the Galaxy S4, this does not indicate increased pricing power of the mobile phone manufacturer. Pricing volatility needs to be considered objectively since it could be contributed by other factors such as product life cycle where the product life cycle of mobile devices are typically a year or shorter.

In the case where inventory of mobile devices is being held by telcos, the need to clear them rapidly (usually through more subsidies) becomes even more pressing as these devices approach their one year mark, where new devices are expected to be manufactured and replace their predecessors. Likewise, having been released for more than a year, telcos are pushing hard to sell the Galaxy S4 since consumers are withholding their purchases as they await for a new device to be released.

By and large, sustained competition amongst the leading mobile phone manufacturers would be the most relevant factor that has kept pricing of mobile devices in check. This is positive for the telecommunications sector as subsidies for mobile devices are down, thus widening its profit margin. From this, it is evident that bargaining power is shifting from mobile phone manufacturers to the telcos. Looking forward, more coordinated efforts between the telcos to further drive down subsidies are expected to be a catalyst for the sector.

Tiered Pricing To Gain Momentum
Though telcos disengage themselves from offering unlimited mobile data bandwidth and began to adopt tiered pricing since the end of 2012, growth in average revenue per user (ARPU) in 3Q13 has not demonstrated significant pick up in momentum so far.

According to the data published by Deutsche Bank, ARPU of post-paid subscribers in 3Q13 was recorded to have grown at 5 percent, merely a marginal increase of 1 percent as compared to the previous quarter. The reason behind the lackluster ARPU growth could be attributed to behaviours of post-paid subscribers who are in the process of adjusting to the new pricing structure.

It has been observed that more subscribers are trading up to a higher tiered mobile phone plans which are bundled with more free data, given that many have been exceeding their allocated free data. As such, this trend is expected to continue as subscribers get a better sense of how much data they actually consume on the faster 4G network.

Innovation In Prepaid
Historically, telcos have always placed their focus on post-paid subscribers for growth in the usage of mobile data. Despite occupying almost 50 percent of the market, pre-paid mobile customers are often overlooked. However, such negligence of pre-paid mobile customers might finally be over as the telcos have appeared to be shifting their focus towards stimulating growth in the usage of pre-paid mobile data instead.

More initiatives have been directed at the pre-paid mobile customers with various launches of pre-paid mobile packages from the telcos. For instance, Singapore’s largest carrier, Singapore Telecommunications (SingTel) started offering WhatsApp services at $0.50 per day or $6 per month in August 2013. Earlier this month, StarHub has responded by announcing its collaboration with WeChat, another popular over-the-top messaging platform like WhatsApp, at $0.40 per day or $6 per month.

Although the take-up rate for such services has not been up to speed so far, nevertheless, more innovations are expected for pre-paid mobile services which are expected to lift the take-up rate.

M1’s Laggard Advantage
After considering the aforementioned factors above, telcos are expected to maintain their positive share price and earnings performance as we move into 2014. While having performed significantly better than SingTel and StarHub, M1’s share price has grown 29 percent since the beginning of 2013, the question looms as whether can such performance in 2013 continue for 2014.

Unlike its competitors who have attempted to capture more growth in their respective pre-paid segments, M1 has yet to make any moves in this space. Although SingTel and StarHub might appear to have the first movers’ advantage, such developments in the prepaid segment are still at its infant stage. In this case, M1 might even be better off by being the late entrant, allowing them to strategise for an appropriate opportunity to enter.

In view of minimal impact from the upcoming QE tapering, the telcos look set to stand firm by operating in an evergreen environment. While paying close attention to M1, its potential upside from its entry into the prepaid segment has not gone unnoticed, as evident by 14 analysts’ ‘Buy’ ratings issued with an average target price of $3.58, representing a potential 12.6 percent upside on its share price.

Analysts’ Rating – M1 Has The Most ‘Buy’ Ratings And Potential Upside

Figures Accurate As Of 11 December 2013

Backed by a strong interest in investments, Peter's research spans across a range of industries, with his focus placed on companies listed on the SGX.

Please click here for more information about this author.

Singtel  3.210 -0.02 -0.62%   
Business: Asia's leading communications group. [FY19 Turnover] Mobile Comm (31.1%), Data & Internet (19.2%), Infocomm Technology (17.5%), Sale of Eqmt (16.5%), Digital Biz (7.2%), Fixed Voice (5.2%), Pay-TV (2.1%), Leasing (0.8%), others (0.4%).

Insight: May-19, FY19 operating revenue remained flat at $1... Read More
StarHub  1.360 -0.020 -1.45%   
Business: [FY18 Turnover] Mobile (34.9%), sale of equipment (22.4%), enterprise fixed (21.6%), pay TV (13.2%), broadband (7.9%).

Insight: May-19, 1Q19 total revenue rose 6% to $596.8m attr... Read More


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