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Phillip: 2 Reasons Why You Should Buy SG Telcos
Aspire, Hot Picks | 15 April 2015
By: Lim Si Jie
Articles (169) Profile

The three largest capitalised telecommunication stocks listed on SGX averaged 8.2 percent gain over the year-to-date. To date, these three telcos generated a 12.2 percent gain in 2015.

For FY15, the three local telcos have guided for a relatively stable outlook. However, Phillip continues to be positive on the Telcos with a recommendation of Overweight on the sector. Phillip points out two main reasons for its recommendation: increasing subscription and improvement in margins.

Tiered Subscription Plans

About 61 percent of postpaid subscribers in Singapore are currently on tiered plans. Out of these 61 percent, 22 percent are exceeding data allowances. Phillip believes that there is still room for “further take-ups in tiered postpaid plans and will drive increasing mobile data revenue”. This will contribute to the topline of telcos in 2015.

Margins Stabilising

Strong iPhone sales received higher handset subsidies and caused margins for telcos to fall in 4Q14. However, Phillip expects Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) margins to recover and stabilise. Moving forward, margins are expected to improve in the following quarters in view of higher mobile data revenue and seasonality trends. This will give telcos an added boost to its bottom-line.

Starhub: Earnings Growth To Resume

4Q14 earnings grew by 10.2 percent yoy on higher EBITDA margin, due to lower traffic expenses.  Starhub managed to beat consensus slightly by 2.1 percent even though FY14 net profits declined two percent yoy to $371 million.

Although Starhub’s management guided for a low single-digit growth in FY15F service revenue, Phillip expects growth to be “driven by mobile data monetisation and enterprise services” for FY15.

With telco stocks being pitched as defensive stocks and “prized” for their stable and attractive dividend yields, Phillip believes that the 20 cents DPS will be maintained for FY15F as per the intention of management.

M1: Slowing Earnings Growth

With full year earnings up 9.7 percent yoy at $175.8 million, M1 managed to exceed its estimates by a small percentage.

With over half of postpaid customers on tiered-plans, Phillip foresees “slower earnings growth momentum ahead”. But Phillip continues to remain positive on M1 largely due to its growth in mobile and fixed services, data monetisation, higher fibre customer base and corporate takeup of M1’s cloud solutions and data centre hosting.

M1 continues to be a stable defensive stock as it declared final dividends of 11cents per share to bring its dividend yield to five percent.

Singtel: Strong Overseas Potential

With strong earnings growth from its associates compared to its peers, Singtel remains the top pick among the three telcos.

Singtel benefited from strong earnings growth from its associates, particularly Bharti Airtel, due to strong growth in mobile data usage and customer base. The strong gains from Singtel’s regional associates will continue to support earnings growth momentum while offseting slowing mobile subscribers growth in the Singapore market.

However, currency headwinds continue to remain a key risk for Singtel with risks of eroding translated gains from its associates.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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