Despite a 14.6% GDP drop in 1Q09, all three telcos showed relative resilience in their latest quarterly results. SingTel (4Q09) surprised on the upside despite a 17% drop in profits yoy, while the 1Q09 performance of StarHub (net profit +3%) and M1 (+10%) were within expectations. Although M1’s profits would have fallen 4% yoy without the help of a lower tax rate, which boosted earnings by $5.5m, normalised earnings would still have been within expectations.

All three telcos reported higher qoq margins as subscriber acquisition costs fell further after peaking in 2Q08. Although SingTel was the only one to buck the declining trend, it still reported higher margins yoy. SAC could rise again as telcos continue to scour the saturated market for growth, especially in the areas of prepaid mobile and Pay TV. M1 could also turn more aggressive to regain mobile market share, especially in 3G post-paid where it has success in 1Q09 due to its Take3 promotion. Hence, margins are likely to be flattish for the rest of the year.

Corporate business has held up well, rising 14% and 13% yoy for SingTel and StarHub. In mobile, lower roaming and IDD usage was seen, as well as lower ARPUs as consumers opted for direct subscription discounts over freebies. However, mobile revenue has been maintained for the most part, except M1 due to its market share loss. Roaming is the least profitable business line due to high interconnect fees while subscription discounts impact margins to a lesser extent than handset costs.

SingTel widened its Pay TV market share to 13% from 10% in 4Q08 as consumers optimised discounts through its bundling promotions. We will probably see more share shift to SingTel in the next 1-2 quarters, possibly as high as 15-17%. But as Pay TV is still the cheapest form of entertainment and StarHub has more attractive content, this erosion is unlikely to become more severe. Similarly, M1 added more broadband subs than StarHub or SingTel in 1Q09, with most of the momentum taken from SingTel. However, this business is not big for either StarHub (12% of revenue) or SingTel (6%), hence we are relatively sanguine.

For the rest of the year, all three telcos have guided for flat to single digit growth in revenue. StarHub stood out for raising EBITDA margin guidance from 31% to 32%, suggesting the company’s confidence of maintaining stability going forward despite market share loss and content costs. Further, cashflow obviously remains strong, as all three have kept to their dividend guidance. We have BUY recommendations on all three with target prices of $3.17 (SingTel), $2.40 (StarHub) and $2.01 (M1).