When worse comes to worst: M1 and Starhub to suffer the most as interest rates normalise

And the trend of yield compression reverses.

Telcos have benefitted from investors searching for yields during the extended period of zero interest rates during 2009-13.

There could be a reversion in yield spread back to their long-term mean of 3.2% for M1 and 3.6% for StarHub and an expansion of 70bp for 10-year government bond yield to 3.0%, according to estimates by UOB Kay Hian.

UOB Kay Hian says that the trend of yield compression could reverse as interest rates start to normalise in 2H15.

UOB Kay Hian adds that M1’s and StarHub’s yield spread are about 1SD below the long-term mean, while on the contrary, SingTel’s yield spread is almost 1SD above the long-term mean. Therefore, the potential downside in a worst-case scenario is more severe at 30% for M1 and 27% for StarHub, compared with only 13% for SingTel.