Hello, smartphones: Voice and SMS under pressure with massive take-up of iPhones

• Maintain UNDERWEIGHT on Singapore telcos. Following our recent meetings with the telcos, we believe voice and SMS revenues could come under pressure. Changing consumer behaviour is likely to shift usage to alternative communications that bypass traditional voice and SMS, fuelled by the popular iPhones and smartphones that have many applications allowing users to bypass both.

Monetising surging data usage is also difficult because of the very generous data bundles. We maintain our target prices and forecasts for stocks under coverage. M1 (Neutral) remains our top pick, for having the most upside from NGNBN and the most benefits from soaring inbound visitors. Our Underperform is maintained for StarHub and SingTel.

• Voice to come under pressure. Voice is expected to face headwinds from: 1) changes in consumer behaviour, which is shifting towards alternative communications that exclude voice or SMS i.e. data messaging and Facebook; and 2) the surging take-up of iPhones and smartphones, which have many applications that allow users to bypass traditional voice and SMS.

• Monetising data remains a challenge. While data usage is surging, monetising it is difficult because of telcos’ generous data bundles, in our view. Lowering data bundles remains difficult unless there is a collective will among the telcos. We believe thebest chance to monetise data lies with long-term evolution (LTE) whereby operators can charge more for higher speeds.

• NGNBN take-up poor. NGNBN adoption remains poor with only 2% take-up by the entire fixed broadband base or an estimated 20K-23K. A number of issues are to blame, including: 1) fewer homes reached vs. homes passed; 2) operational or teething issues; 3) a lack of killer applications; and 4) little need to upgrade for higher speeds.

• 2Q11 expectations for M1. We broadly expect a 2Q11 core profit of S$44m-45m, up 3-6% qoq, in line with our FY11 forecast. Margins should be stable as we are not expecting subscriber acquisition costs to rise sharply. M1 is expected to release its results on 14 Jul.

• Expectations for StarHub. For StarHub, we expect a net profit of S$78m-79m, representing 12-13% qoq or 33-34% yoy growth, in line with our FY11 estimate. We expect cable revenue to be fairly stable and broadband revenue to be up very slightly. Margins should improve qoq as 1Q11 was marred by higher marketing costs, which should trend lower in 2Q11. StarHub is expected to release its results on 4 Aug. We will preview SingTel’s results separately.