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Broker's take: PhillipCapital remains 'overweight' on telecoms sector, upgrades calls on sector's stocks

PHILLIPCAPITAL remains "overweight" on the Singapore telecom sector and has upgraded its calls on the sector's three stocks, it said in a report on Monday.

The brokerage expects mobile and pay-TV revenues to remain weak in 2019 but should stabilise in 2020. That said, revenues from the enterprise segment could gain 20 per cent in 2019 on the back of smart nation initiatives, cybersecurity and managed services.

PhillipCapital's favoured picks in the sector are Singtel (upgraded to "buy" with a target price of S$3.66) and NetLink NBN Trust (upgraded to "buy" with a target price of S$0.93).

PhillipCapital analyst Alvin Chia said that the brokerage favours Singtel, which has seen its share price on an uptrend in contrast with most of the local market in May, for its recovering regional associates. 

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While Singtel associate Bharti Airtel had weighed on the Singapore telco's earnings in recent quarters, Mr Chia is expecting price hikes from Airtel competitor Reliance Jio as it seeks a return on their investments after capturing a similar market share to Airtel as a result of a price war.

In Indonesia, Telkomsel is on track to recovery as competition is easing and the brokerage sees growth possibilities outside Java while Singtel's associate in the Philippines, Globe, has positive momentum on data monetisation.

"A growth driver will be the enterprise segment as Singtel gains better traction on smart nation initiatives and higher demand for information and communications technology (ICT) services," Mr Chia said.

The Australian Competition & Consumer Commission (ACCC) decided to oppose the merger of TPG Telecom (TPG) and Vodafone Hutchison last month, which could pose competition to mobile network operators (MNOs) such as Singtel's Optus.

TPG, a mobile virtual network operator in Australia, may end up rolling out its own network to compete with MNOs. Mr Chia said it could mean that "TPG’s typical aggressive pricing strategy may increase revenue pressures on Optus’s mobile service segment". 

"There is a silver lining, the failure of this would imply that TPG will deploy more resources in its core Australian business and may neglect or withdraw the rollout of its network in Singapore," he added.

NetLink NBN Trust, PhillipCapital's other pick, was upgraded following its unit price slide in May.

It is favoured for its dominance in supporting fibre end-user connections in the residential segment, which have become the core of the trust's stable and predictable revenue stream, Mr Chia said.

Meanwhile, StarHub was upgraded to "accumulate" with a target price of S$1.62 following a its stock price slide last month.

Even though the telco continues to face headwinds from the mobile and pay-TV segment, Mr Chia said its enterprise segment continues to grow on the back of higher managed services and cybersecurity.

"We are awaiting further clarity on the profitability of Ensign, StarHub’s cybersecurity arm. We think it may be a potential re-rating catalyst for StarHub," he added.