Published October 8, 2008

Telco stocks still seen as defensive plays

Local telcos a safe harbour to weather surging economic storm, say analysts

By WINSTON CHAI
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DESPITE warning bells from Singapore Telecommunications (SingTel), market analysts still see the local telco sector as a safe harbour for weathering the surging economic storm.

Casualty: SingTel's cost-cutting measures include a headcount freeze

The Republic's largest operator on Monday said it has instituted cost-cutting measures such as a headcount freeze as some parts of its local business are starting to feel the heat from the global financial meltdown. The news sent SingTel shares down by as much as 1.6 per cent at the start of trading yesterday before eventually recovering to close 2.6 per cent higher at $3.12.

While SingTel is one of the first local companies to claim casualty in the face of the economic crisis, market analysts believe that telcos are generally in good shape to tackle the mounting economic challenge.

'We see this as an early warning to tone down market expectations for SingTel Singapore,' said Terence Wong, co-head of research at DMG & Partners. 'The impact (of the economic crisis) will not be as great on the telco sector compared with other industries such as technology and manufacturing,' he stressed.

Echoing the view, OCBC research analyst Carey Wong said: 'We are not saying that telcos won't see a reduction in earnings, but rather the fall is likely to be less compared with other companies that depend heavily on discretionary spending.'

This is because telecommunications firms have two things in their favour.

First, the telco's business does not hinge on cyclical demand and consumers are already accustomed to spending on mobile services that account for a mere fraction of their overall expenditure.

While there could be a cutback when the crisis first sets in, 'consumer usage patterns tend to revert back to the norm after the initial knee-jerk reaction', Mr Wong explained.

Secondly, telcos could continue to see a strong demand for business services such as tele-conferencing and long-distance calls with companies reining in their corporate travel expenses, said Mr Wong from DMG & Partners.

OCBC is maintaining its 'buy' call on the three local telcos, while DMG & Partners is holding on to its 'buy' recommendation for SingTel and StarHub, as well as its 'neutral' rating for MobileOne (M1).