Resilient 4Q CY08 earnings as expected. All the three telcos - MobileOne, SingTel and StarHub - reported a pretty resilient set of results recently. M1's 4Q08 results, though slightly weaker YoY and QoQ, were slightly better than expected, aided by an improvement in EBITDA as it had been less aggressive during the traditionally competitive holiday period. SingTel's 3Q09 results were broadly in line with our forecasts, although there was some disappointment with its regional associates' performances. Likewise for StarHub, its 4Q08 results were also within our expectations, while its FY08 earnings were slightly better than our estimate.

Operationally still going strong. But more importantly, all three telcos expect their operations to remain stable in 2009. For M1, it is also looking to keep its service EBITDA margin of 43-44% and maintain its 80% dividend payout ratio. For SingTel, it expects operating revenues for both Singapore (excluding SCS) and Australia to grow at mid single-digit levels, with Singapore's EBITDA margin staying at 40%; but warns of lower associate contributions and adverse forex movements. Lastly, StarHub expects FY09 operating revenue to grow by low single-digit, while keeping service EBITDA margin at 31%; more importantly, it aims to continue to pay S$0.045/share dividend quarterly, making for S$0.18 total for the full year.

More rational competition amid slowing economy. But the rapidly slowing economy will continue to impact consumer spending, and while we do not expect the telcos to be spared, we believe that the impact should be relatively limited as we see telecom services as being a need rather than as a luxury. We also expect less aggressive sales & promotion (S&P) expenses. We have already been seeing an easing in the telcos' acquisition costs over the past two quarters and we see this trend continuing although M1 may have to maintain a relatively higher S&P ratio versus the other two telcos to make up for its lack of bundling abilities. Otherwise, we expect the telcos to maintain status quo.

Maintain Overweight on telcos. Even though we are penciling in modest declines in both revenue and earnings for all three telcos this year, these declines pale in comparison to expected tumble in earnings of companies reliant on discretionary spending. Hence we still expect telcos to show relative outperformance this year, backed by their attractive dividends (M1 and StarHub). As such, we maintain Overweight on the sector.