Singapore Telecom Companies:2Q11F Preview and key sector issues (DBSVickers)

· 2Q11F earnings of StarHub & M1 are likely to reinforce sector’s appeal as bastion of stability.

· Potential decline in smartphone sales in 2H11F to benefit StarHub more; Downgrade M1 to HOLD after its recent run-up.

· Cross-carriage to start from Aug 1, but may not have sharp teeth to make a difference.

2Q11F earnings should reaffirm sector’s defensive appeal. M1 is likely to report 2Q11 earnings of S$42.5m (0% QoQ, +4% YoY) on 14th July, as its fair value accounting may not leave much scope for improvement. StarHub is likely to report 2Q11 earnings of S$74m (+7% QoQ, +27% YoY) on 4th August in a seasonally strong 2Q as it recovers from the impact of “dunning” in 1Q11.

Potential decline in smartphone sales in 2H11F & FY12F may benefit StarHub. High penetration of smart phones (60-65%) in Singapore may imply lower smartphone sales in 2H11F, implying lower subsidy burden at StarHub & SingTel. Lower smartphone sales, on the other hand, may adversely impact M1’s earnings due to its unique practice of fair value accounting. While M1 is a key beneficiary of National Broadband Network, it may take another 2-3 years to show significant profit contribution from the new business.

StarHub is our new top pick after M1’s recent outperformance. YTD total returns are 15% for M1 (our previous top pick) versus 11% for StarHub and –1% for STI. At current price, M1 offers 6-7% dividend yield based on 80-100% payout ratio vs assured 7% for StarHub. MI offers flat earnings in FY12F versus mid-single digit growth at StarHub.

Cross-carriage to start from Aug 1, but impact may be muted. Cross-carriage applies only to the “exclusive” content signed after Mar 12, 2010. Firstly, StarHub has locked-in most of the popular content on exclusive basis before Mar 12 for 3-5 years. Secondly, content can still be signed on “non-exclusive” basis where pay TV operators negotiate the price as opposed to bidding earlier. As long as other pay TV operators do not buy “non-exclusive” content rights, they would not be able to cross-carry those contents.