SINGAPORE (Mar 15): OCBC Investment Research is maintaining “neutral” on Singapore’s telco sector in the wake of the 4QCY18 reporting season, which saw StarHub and M1 results come in within expectations, while that of Singtels was slightly under.

Nonetheless, the research house continues to favour Singtel and NetLink NBN Trust with a “buy” rating for both and the respective fair value estimates of $3.79 and $90 cents.

In a Friday report, analyst Joseph Ng says the latest financial reporting quarter’s “big surprise” came from StarHub’s deep DPS cut from 16 cents in FY19 to potentially 9 cents in FY19, which is significantly lower than his expectations of 12 cents in FY19.

Given StarHub’s new variable 80% payout ratio, the reduced DPS implies a NPAT of about $195 million, which is about 9% lower than FY18’s $215 million underlying NPAT.

He also observes that StarHub’s yield spread against that of Singtel has now compressed from 330 bps in the previous financial year to -10 bps.

“Singtel has guided that it will maintain its 17.5 S-cents DPS for FY19 and FY20, despite the US$525m that will be going towards the group’s participation in Bharti Airtel’s rights issuance, with respect to its 15% direct stake,” says Ng.

On the other hand, Ng also highlights that NetLink NBN Trust exceeded its IPO projections over the latest quarter and benefitted from more orders from StarHub, as the latter is preparing to cease cable services from July 2019.

Going forward, the analyst sees the telco incumbents seeking to share infrastructure as the Singapore government intends to roll out 5G in 2020 – considering how it would likely be “untenable” for all four mobile network operators to build out their own, in Ng’s view.

He also views the ongoing competition in the mobile postpaid scene as great news for consumers, despite the erosion of telcos’ average revenue per user (ARPU) in the process.

“ARPU-eroding developments should not come as a surprise, given TPG’s impending commercial rollout. However, more aggressive contract-less SIM-only plans might do little for customer stickiness, though operators do have little alternatives, given its increasing popularity and longer handset replacement cycles,” says Ng.

As at 11:56am, shares in Singtel were trading 2 cents higher at $3.01, while NetLink NBN Trust was down by half a cent at 79 cents.