Singapore Telecommunications - UOB Kay Hian 2016-09-05: Bharti Airtel ~ Challenged By Reliance Jio

Singapore Telecommunications (ST SP) - UOB Kay Hian 2016-09-05: Bharti Airtel – Challenged By Reliance Jio SINGTEL Z74.SI

Singapore Telecommunications (ST SP) - Bharti Airtel – Challenged By Reliance Jio

  • Bharti Airtel faces formidable challenge from Reliance Jio, which has captured consumers’ mindshare in India by offering free voice calls. Bharti Airtel contributed 12.9% of group PBT in FY16. 
  • We have trimmed our earnings forecast for Singtel by 0.4% for FY17 and 0.9% for FY18 and lowered our target price to S$4.53. Maintain BUY.



WHAT’S NEW


Aggressive launch by Reliance Jio. 

  • Reliance Industries and its chairman Mukesh Ambani have launched its mobile venture Reliance Jio Infocomm during their AGM last Monday. The attractiveness of Reliance Jio’s service offering was breath-taking. All voice calls are free and there will be no domestic roaming charges. Data is priced at the cheapest rate of Rs50/GB. The pricing structure is simplified to just 10 tariff plans.
  • Commercial services will commence on 5 Sep 16, and will be free for 90 days till the end of the year, in what Mukesh Ambani calls the “Jio Welcome Offer”. Reliance Jio has set a lofty but aggressive target of acquiring 100m subscribers as soon as possible.
  • Reliance Jio has an all-IP and pure 4G network that covers 18,000 cities and 200,000 villages. It aims to achieve population coverage of 90% by Mar 17. Reliance Jio is in the process of rolling out 1m WiFi hotspots by mid-17.

Overcoming shortage of spectrum. 

  • Reliance Jio owns spectrum in the 800MHz and 1,800MHz frequency bands in 10 and 6 circles, respectively, out of a total 22 circles in India. It also owns a pan-India license for the 2,300MHz band. Reliance Jio has entered into a spectrum sharing deal with Reliance Communications, which is backed by younger brother Anil Ambani, for the 800MHz band across seven other circles.
  • Reliance Jio is said to have incurred huge capex exceeding Rs1t (US$15b). Its commercial launch has also been delayed by as much as two years.


STOCK IMPACT

  • Hit by double whammy. Singtel has corrected 8.3% last week due to concerns over increased competition in Singapore and India. We believe the retracement last week has factored in negative developments in both Singapore and India.
  • Bharti Airtel contributed to 12.9% of Singtel’s group PBT. Its share price dropped 9.6% from last Monday to Thursday but recovered 2.6% on Friday.


EARNINGS REVISION/RISK

  • We have trimmed our net profit forecast for Singtel by 0.4% for FY17, 0.9% for FY18 and 1.5% for FY19 as consensus earnings for Bharti Airtel was revised down by 2.7% for FY17, 7.1% for FY18 and 11.5% for FY19.


VALUATION/RECOMMENDATION

  • We have lowered our target price for Singtel to S$4.53 based on DCF (required rate of return: 5.75%, growth: 1.2%). We have assumed a worst-case scenario whereby a fourth mobile operator disrupts the status quo.


SHARE PRICE CATALYST

  • Singtel is the least affected by a fourth mobile operator in Singapore as overseas businesses accounts for about 70% of its bottom-line.
  • Singtel will benefit from growth at its regional mobile associates, such as Telkomsel in Indonesia, Bharti Airtel in India, Advanced Info Service in Thailand and Globe Telecom in the Philippines.
  • Since it is the largest and most liquid defensive stock listed on the Singapore Exchange, Singtel deserves to trade at a premium.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-09-05
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.53 Down 4.610


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