“We would like to see that number move back down towards the $100 mark but clearly, it’s trending in the wrong direction.” said Terry Clontz, CEO of StarHub, in the company’s quarterly results presentation. It could easily be another comment on recent oil prices, but he was definitely more concerned about the acquisition costs that came with full mobile number portability (MNP). Widely expected to churn up the local telco scene, MNP kicked in, fatefully it seems, on June, Friday the 13th this year, Clontz noted.

Local telcos have run up their expenses prior to MNP, responding with a slew of campaigns to defend their customer base. All three telcos reported on-year increases in their acquisition and retention costs, as well as in advertising budgets, with notable declines in margins. However, the postpaid segment remain relatively stable, as the telcos’ offering of bundled deals do lessen the effects of price competition. But highly visible ads don’t always tell the whole story.

Not Just TV Ads

While defending the postpaid segment makes sense, the effects of MNP isn’t just confined to that segment. The prepaid sector, without the usual contractual obligations, is particularly price sensitive and price competition does significantly influence consumer choice. SingTel reclaimed her pole position in the prepaid arena as it targeted the foreign worker with aggressive marketing. In the quarter leading to MNP, SingTel saw its average revenue per user fall 12.5%, as a result of its free international call offerings. The upshot: 151,000 new subscribers.

StarHub responded with the Happy $128 card, which was launched in May-08. But not before it experienced a bleed of some 4% from its prepaid customer base. Clontz informed that this segment has stabilised since its response and explained that data from the prepaid segment generally has a six-month lag, as he took some pains to reassure his audience that the bleed has been stemmed to some extent. Both StarHub and M1 saw their overall mobile market share decline, as SingTel extended its reach in the local market. Despite the sanguine response of the telcos, the third quarter of 2008 is starting to look interesting.

For a start, IDA is scheduled to release the results of the tender to deliver the infrastructure on the nation’s Next Generation National Broadband Network (NGNBN). But for the moment, the results of the tender is not expected to impact earnings until 2-3 years later. Given that there is a second tender to operate the NGNBN, the telcos will look to the results of the first tender before making a move. The euphoria of SingTel’s iPhone launch, to be on 22 Aug-08, has also been curtailed, as StarHub is expected to offer it by the end of the year. M1’s defensive move, in the run-up to the NGNBN tender results, is to finally launch its own fixed line broadband service. And SingTel is definitely upping the ante on the Pay TV front.

Solid Defensive Plays

But lest it detracts us from the fundamentals, the fact is that telcos remain as good defensive plays in times of volatility. With a stable and largely predictable earning base, these stocks provide investors with a safe harbour, especially in the current economic climate. All 3 telcos also pay regular dividends, competitive pressures notwithstanding. M1’s and StarHub’s historical yield are above 5%.

While SingTel drew some flak for its lower than expected payout for FY08, it has, in a recent talk with analysts, reiterated that it has increased its ordinary dividend payout from 45% to 60% of underlying net profit, up from 40% to 50% previously. Although its dividend yield is the lowest among the three telcos, SingTel’s geographical diversification, which the other two lack, is a plus point. SingTel’s shares have also outperformed the STI since the beginning of the year. For the current financial year, M1 has committed to paying out about 70% of underlying profits, while StarHub’s targeted payout of 18 cents per share should up its yield to about 7%.