Time to close shorts in Singapore Telcos, Singtel remains top-pick

M1 released Q3 2017 results on the 16th of October and I am now ready to close a long-standing negative position on the sector. Singtel remains the top long-term pick.

M1 Results Takeaways

This is not to say that the results were excellent, but at this stage the negatives are largely recognized and increasingly priced in, while signs of stabilization or dare I say improvement are becoming visible. Let’s briefly review the results (all growth numbers expressed as change vs previous year’s 3rd quarter):

  • number of mobile subscribers broadly stable (+0.7%) with postpaid rising 3.2% and prepaid falling 3.4%
  • voice minutes down -10% (postpaid) and -26% (prepaid)
  • acquisition cost per customer S$378 vs S$357 (although in-line with previous years)
  • ARPUs generally negative
  • Data usage up massively to 4.2GB/month from 3.4GB a year ago
  • As a result, mobile data contributed 55.9% of revenues, up 1.7% points
  • Mobile Telecommunications revenue +3.4% to S$160.5m
  • Fibre customers up 30k to 182k, while ARPU declines modestly
  • EBITDA broadly stable (+1.3%)
  • Operating cashflow is broadly stable ex-working capital changes
  • Free Cashflow generation was stable ex-working capital changes and ex-spectrum rights payments
  • Net Debt/EBITDA remained stable at at 1.3x (up 0.1x)

As noted earlier, dividends have been cut to 11.1 cents in 2017 (from 15.3 in 2016 and 21.2 in 2014) and further steep cuts should not be required.

Clearly, data usage is exploding and further substituting traditional voice calls – a trend likely to continue. 33% of data plans were exceeded – ie customers went over limit and had to pay extra. There will surely be further pressure on the market in the coming years as TPG enters the game, however for now 1) data usage is growing and will help the whole sector 2) dividends and expectations have been reduced sufficiently and 3) current results are stable to positive. A dividend yield of 5% or more (6.1% on trailing 12-month dividends paid) is likely to be maintained from the current entry price (S$1.80). I am thus closing the long-held short position on M1 and Starhub.

Singtel remains top long-term pick

Singtel remains the top-pick as it is best placed to defend its turf in Singapore via triple and quadruple plays – and important advantage in an environment of growing data volumes – as well as high market share at 52.2%. The positive view on Singtel is, however, not driven by a view on the domestic market, which represents less than 10% of its value, but rather its associate companies. Bharti Airtel (about 25% of Singtel’s value) is the clear winner from India’s mobile sector consolidation. It has recently announced the acquisition of Tata’s consumer mobile service in a favorable transaction. The share price of Bharti has responded appropriately, rising over 30%. Globe Telecom is performing well, gaining market share in the Philippines, while Telkomsel has reported strongest YoY growth numbers among operators in Indonesia. Data volumes at AIS in Thailand have been exploding. Even Optus in Australia is experiencing a period of recovery after network upgrades have been completed.

Singtel has a 4.7% dividend yield, which is safe, an excellent diversified portfolio and great management. It makes it the top long-term pick in the sector – risk-on!