ASIAN STOCKS RALLIED on Friday after three days of losses, after better-than-expected employment and manufacturing data out of the US. In Singapore, better-performing exports in November also boosted market sentiment. Non-oil domestic exports rose 1.6% from a year ago, helped by stronger shipments of pharmaceuticals. By midday, the Straits Times Index in Singapore was up by 0.4%.
However, analysts caution that the outlook for 2012 will remain cloudy and more economic and corporate earnings downgrades are to be expected in the coming months. Additionally, while the recent selldown has brought stock prices to a reasonable level, the lack of investor confidence is going to limit any gains. “The preference for safer assets will continue, and defensive and good dividend yielding stocks will remain in favour,” the OCBC Investment research team notes in a new report.
Among analysts’ preferred sectors is telecommunications -- the three main telcos Singapore Telecommunications, M1 and Starhub -- which although will not be immuned to a market selldown, is expected to outperform the index on a relative basis, given their defensive earnings and attractive dividend yields. Growth is set to be driven by higher mobile data usage given the proliferation of smartphones and tablets. “However, the key challenge for operators here is how to monetise this seachange in consumption patterns,” writes OCBC analyst Carey Wong in a recent report.
Additionally, the islandwide-rollout of the Next Generation National Broadband Network (NBN) is expected to result in more subscriptions to the fibre network, although this would be more gradual than exponential given the uncertain economic environment’s impact on spending.
OCBC prefers M1. “It has been the laggard among the three in 2011, and it may have the most to gain from the progressive NBN roll-out in 2012,” Wong says. Furthermore, unencumbered by “legacy issues” that plague the other two telcos, M1 has been offering attractive packages at recent roadshows to sign up new fibre network customers. Analysts note that the telco has already some 16,000 fibre customers as at the end of September, and it aims to capture at least a 20% market share.
However, UBS says M1’s broadband business could drag down overall margins in the initial startup years due to the lack of scale. But analyst Ling Vey Sern says that M1’s management is committing to maintaining an 80% payout ratio, which translates to a 6.5% yield on FY12 estimated earnings.
Ling also notes Starhub’s stable quarterly dividend of $0.05 per share. “We estimate Starhub would have the highest dividend yield among Singapore telcos, at 7% FY2012E.” Ling adds that the distribution is sustainable because of the telco’s strong balance sheet, a free cash flow at 9M2011 of $420 million that would cover the $342 million required for annual dividends, and Starhub not having to pay cash taxes in 2011, as well as only a minimum in 2012.
For Singtel, UBS notes that it has regularly paid out about 55–70% of its earnings, and conducts a special dividend review every three years. “If it does not make a significant acquisition in the next three years, we estimate it could pay another special dividend of 10 cents per share in end FY14, bringing the average yield to 6.8% per annum in Fy12-14,” the analysts note.
The company is seen as defensive given its major stakes in regional associates such as Bharti Airtel in India, which has a 30% share of mobile revenue in the country. OCBC analyst Wong also notes that Singtel plans to move away from being a pure carrier towards content aggregation and creation. This is expected to help it differentiate itself against its competition as well as capture growth opportunities.
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