By Carey Wong
Thu, 5 Feb 2009, 10:09:27 SGT

SingTel and StarHub are due to report their earnings on 10 Feb and if M1’s results were anything to go by, we expect them to report similarly resilient earnings. We expect SingTel to show a slightly QoQ decline (<5%) in its 3Q09 revenue, as the economic slowdown takes a slight toil on its business. However, net profit could show a bigger decline, mainly due to reduced contributions from its associates. We are looking for StarHub’s 4Q08 revenue and earnings to show marginal QoQ improvements (<5%), thanks to its bundling capabilities, which should continue to offer value in the current economic climate. Even though we are penciling in modest declines in both revenue and earnings for all three telcos this year, but these declines pale in comparison to the expected tumble in earnings of companies reliant on discretionary spending. Hence we still expect telcos to show relative outperformance this year, backed by their attractive dividends (M1 and StarHub). As such, we maintain Overweight on the sector.

Resilient earnings expected. SingTel and StarHub are due to report their earnings on 10 Feb and if M1’s results were anything to go by, we expect them to report similarly resilient earnings. As a recap, M1’s 4Q08 results – though weaker YoY and QoQ - were slightly better than expected, aided by an improvement in EBITDA as it had been less aggressive during the traditionally competitive holiday period. And despite the current economic downturn, M1 has also guided for its FY09 operations to remain stable and its service EBITDA to remain around 43-44%; it also kept its 80% dividend payout ratio.

Associates may still weigh on SingTel. Due in the morning, we expect SingTel to show a slight QoQ decline (<5%) in its 3Q09 revenue, as the economic slowdown takes a slight toil on its business. However, we expect net profit to show a bigger decline, mainly due to reduced contributions from its associates. But this should come as no surprise as SingTel had already guided for associates to turn in lower YoY pre-tax contributions (versus previous low double-digit growth); Globe Telecoms (44.5%-owned by SingTel) has just reported a 15% YoY drop in its FY08 earnings and also noted of a more challenging 2009. Still, should Singtel’s results come in better than our expectations, we see room to revise up our FY09 estimates.

StarHub should benefit from bundling. Later in the same evening, StarHub will report its 4Q08 results. We are looking for revenue and earnings to show marginal QoQ improvements (<5%), thanks to its bundling capabilities, which we believe should continue to attract consumers looking for value in the current economic climate. We are also expecting StarHub to pay out S$0.045/share dividend as promised; this payout is also likely to continue this year, supported by its healthy operating cashflows. While we see rising content cost (cable TV operations) as a concern, we do not believe bidding will get out of hand in the current economic environment.

Maintain Overweight on telcos. Even though we are penciling in modest declines in both revenue and earnings for all three telcos this year, but these declines pale in comparison to the expected tumble in earnings of companies reliant on discretionary spending. Hence we still expect telcos to show relative outperformance this year, backed by their attractive dividends (M1 and StarHub). As such, we maintain Overweight on the sector.