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Brokers' take: DBS cuts M1, StarHub target prices ahead of results

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M1's and StarHub's respective counters are "fully valued" as the success of new rivals weighs on growth while high capital expenditures limit their dividend outlook, broker DBS said in reports on the two telcos on Monday.

DBS lowered its 12-month price target from S$1.78 to S$1.49 for M1, and from S$2.33 to S$2.20 for StarHub.

M1 stock traded flat at S$1.815, while StarHub was up a Singapore cent at S$2.68 as at 1.56pm.

Writing before M1's third-quarter results announcement - expected to be released after market close on Monday, DBS said that the market is not paying enough attention to industry newcomer Circles.Life, which "in its short history of less than 12 months of operations seems to be doing well by virtue of its service delivery model and cheaper data pricing".

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M1 also faces rising depreciation and amortisation costs, with S$188 million expected to be paid for the 700 megaHertz spectrum when it becomes available, DBS wrote, while StarHub is set to pay S$350 million for spectrum that it acquired in 2017's auction.

Even if M1 and StarHub are able to maintain earnings before interest, tax, depreciation and amortisation (Ebitda) in fiscal 2018 and 2019, their earnings are set to decline sharply, the broker said.

In light of those factors, M1's forecast dividend yield of about 5.6 per cent for FY18 and an expected earnings decline of 12 per cent over FY17 to FY19, do not look attractive when held against listed peers such as Singapore Telecommunications' approximate 5 per cent yield and expected annual earnings growth of about 3 per cent.

And while StarHub will maintain an annual dividend per share (DPS) of 16 Singapore cents in 2017, its annual DPS could be cut to 14 Singapore cents in fiscal 2019 in order to stay below a ratio of net debt-to-Ebitda of two, the DBS report said.

StarHub's hubbing strategy of bunding mobile, broadband and pay-TV services has also come under pressure from the proliferation of over-the-top (OTT) TV services, DBS said, noting that nearly 14,000 customers with subscriptions to three or more services - representing about 4 per cent of such subscriptions - have downgraded since Q2 2016.

"We believe downgrades of hubbing subscriptions would accelerate amid the increasing appeal of OTT TV services among high-end pay TV customers and rising pressure on the broadband segment from M1 and MyRepublic," the report on StarHub added.

Another new entrant to the Singapore telco market, TPG, is also looming around the corner.

"Weak second-half FY17 results even before the actual launch of operations by TPG (expected in late 2018) could lead to further downward revision in consensus earnings and the valuation of M1, in our view," DBS said.

Even so, where StarHub is concerned, DBS's bull case scenario sees Circles.Life and TPG gaining mobile revenue share of only 3.5 per cent in 2022, instead of 5.5 per cent in its base case scenario. If the former comes to pass, this will raise StarHub's target price to S$2.57. Any delay in TPG's rollout could also help M1 to sustain its revenue share, potentially lifting the latter's target price to S$1.66.

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