Telco /M1 / Starhub

Telco /M1 / Starhub: Deutsche notes the telco sector has outperformed over the past 6 mths, as expected given the difficult markets. But highlights that telco share prices have increased, vs in 2008 when the outperformance was driven by telcos declining less than other stocks. Believes this has made telcos relatively expensive, and the majority of them is now trading at a premium to their own three yr and fives yr historic average valuations.

The house has a high conviction Sell on M1. Remains unconvinced that the National Broadband Network (NBN) significantly alters M1’s competitive positioning or growth profile, as it believes M1 will face an uphill task in gaining scale as a late new entrant into the mature fixed market. With a limited service offering, Deutsche believes M1 will need to compete on price which may be margin dilutive.

Deutsche’s top pick is Starhub for the relatively stable (albeit slowing) operations and dividend yield. Notes competition within the fixed-line sector is expected to intensify as the fibre-enabled NBN approaches 100% coverage, and increased operator emphasis on service bundling will drive competition across all products and result in more aggressive retention/acquisition activities, with potential margin implications. Expects a sustained regulatory focus on competition but does not anticipate any significant developments within the near-term. Overall, views the sector's operational outlook as challenging and would be cautious from a fundamental perspective.