Two hits & a miss. In the quarter ending 30 Sep 08, all three telcos saw earnings come off. Thetwo smaller telcos – StarHub and M1 - came in within our expectations while SingTel disappointeddespite us lowering our earnings a week before the results. Overall, M1 was the hardest hit as thebulk of its earnings are derived from the highly competitive mobile segment.

Margins on the path to recovery? Full MNP was implemented on 13 Jun 08. Competition wasintense for the year preceding that, resulting in a heavy hit to the EBITDA margins. Our discussionwith all three telcos seems to suggest that they will be tapering off their aggressive marketingcampaigns, which is good news for the industry.

Financials still healthy. The financials of the three are sound, despite StarHub having a somewhateye-popping gearing of 7.6x. If not for its capital reduction exercise, the net gearing would havebeen only 0.7x. The cash it generates is also more than sufficient to repay its debts, as gleanedfrom its Net Debt/EBITDA of 1.2x and interest coverage of 23x. It is the same story for M1, whichhas a gearing of 128% and a manageable Net Debt/EBITA of 0.8x. Interest coverage stands at40.6x.

Dividends still attractive. The telco industry’s yield of 8.6% compares favourably against themarket’s average of 5.9%. Given healthy cash flows, the companies should have the capacity tocontinue with rich payouts, particularly M1 and StarHub. The telco industry in Singapore is also fairlyresilient and is not as sentiment driven, so the impact from the current downturn should not be aspronounced. SingTel, the only listed operator with foreign exposure, has been hit by challengesfrom its Australian subsidiary Optus as well as its regional associates. Maintain OVERWEIGHT onthe sector, with BUYs on domestic telcos M1 and StarHub.