Telco stocks expected to ring in good value

Analysts see them as fairly safe bets in times of economic uncertainty next year

By SIOW LI SEN

SINGAPORE's three telco stocks are among the best bets as defensive stocks for next year amid economic uncertainty and continuing volatility in the financial markets.

Not surprisingly, Singapore Telecommunications, the biggest listed company by market capitalisation here, gets the most votes.

But StarHub and M1, ranked the Number 2 and 3 telco players, have their own fans, too, who look to the smaller telcos for their high dividend payouts.

Telco stocks will continue to perform well next year benefiting from the liberal foreign workers policy as well as Singaporeans' continuing love affair with the handphone.

They also offer strong recurrent cash flows and attractive dividends and cash payouts. In addition, the telcos' focus on their own business and their conservative management teams are reassuring to shareholders in that they hold no nasty surprises in terms of investments in high-risk financial instruments or foreign currency trades that other companies have bought to maximise returns on their spare cash.

'With rising oil prices and lingering concerns about the impact of the sub-prime crisis on the US economy, we continue to maintain a defensive stance focusing on stocks and sectors with good earnings visibility, reasonable valuation and attractive yield,' said Lim Jit Soon, Citigroup Singapore strategist, in a report last month.

'We overweight telcos, media, banks and conglomerates. We are neutral, property and underweight transport, tech, consumer staples and healthcare,' he said.

DBS Vickers Securities' Sachin Mittal this month said the telecom sector is a direct beneficiary of healthy economic and population growth from the influx of foreign workers and tourists.

The pre-paid mobile phone subscriber growth is estimated at around 150,000 every year for the next 10 years.

DBS has forecast 6.5 per cent economic growth in 2008.

SingTel gets the most votes from analysts for its strong performance and ability to win the lion's share of new subscribers.

SingTel is also the top choice for its investments in the top growth markets in the region - in particular, its 30 per cent stake in India's Bharti and 35 per cent interest in Indonesia's Telkomsel.

Even potential regulatory reversals on the spectrum front at Bharti and recent anti-monopoly rulings in Indonesia are seen as small risks on the horizon.

Macquarie Research analyst Ramakrishna Maruvada calls SingTel the 'perfect cocktail'.

'Our positive thesis rests on three planks: fundamental value driven by Indian investment and prospects for capital management; supportive relative valuation metrics; and top-down thematic considerations amid global credit concerns,' he said.

Mr Maruvada said SingTel's estimated $4.5 billion surplus capital by FY 2009 provides room for its regional expansion strategy or capital management initiatives.

He added that market focus on credit issues has led to a global re-rating of liquid telecom stocks offering diversified exposure to emerging markets. 'SingTel benefits from this theme.'

It isn't that the three telcos don't face risks.

These include mobile number portability to be introduced next May and the nation-wide broadband network which will bring in more competitors.

But their strong cash flow generating ability trumps most risks.

A UBS report on the 2008 outlook for Asian telecoms said that as the markets mature, many operators are facing a similar enviable dilemma: slowing topline growth and a build-up of cash.

UBS estimated SingTel's dividend yield to be 3.5 per cent and 4.1 per cent for 2007 and 2008, respectively.

For StarHub, it forecast dividend yields of 13.2 per cent and 5.4 per cent; and for M1, it's 15.5 per cent and 7.7 per cent.

DBS's Mr Mittal sees 3.6 per cent cash yield for SingTel, 5.3 per cent for StarHub and 7 per cent for M1 in the current year.

Going forward, he expects StarHub and M1's total cash yield to be up to 10 per cent for the next one to two years as a result of capital management initiatives.