Telecommunications - Dialling On The Number Four
- Concerns over competition should continue to haunt investors as Singapore shifts from a three player market to a four player model in 2017. TPG Telecom (TPG), the new 4G mobile network operator (MNO) would likely take time to ramp up its network and should not pose a significant challenge to the incumbents until 2018.
- With sector valuations looking fair after the gruesome selldown in 2016, coupled with the lift-off in US interest rates, we retain our NEUTRAL stance. Singtel remains our preferred exposure, being the least vulnerable to heightened domestic competition.
- Our earnings forecasts have modelled in the fourth player impact.
Competition should remain heated but rational.
- We expect competition to intensify in 2017, underpinned by:
- More aggressive customer acquisition and retention efforts as the incumbents pre-empt the entry of TPG;
- TPG could look to replicate its successful track record in fixed broadband Down Under and cross-sell with its mobile service.
- Still, the overall impact on the industry is likely to be neutral in the short to medium term, in our view, as TPG would need time to roll out its network and could face issues securing sites. The broader data monetisation challenges in the market suggest that operators are unlikely to engage in irrational pursuits on the back of the shrinkage in industry mobile revenue (9M16: -2% YoY).
- On the positive side, 4G is looking increasingly mainstream (69% of subs on tiered plans), which should further improve the economics of data.
TPG is the number four.
- On 14 Dec, the Infocomm Media Development Authority (IMDA) announced that TPG has been provisionally awarded the fourth mobile licence following the conclusion of the New Entrant Spectrum Auction (NESA). The Australian Securities Exchange (ASX)-listed fixed broadband/mobile operator was the underdog going into the NESA but outbid crowd favourite, MyRepublic (MR), for 60MHz of 4G spectrum (2x10MHz of the 900MHz/40MHz of 2300MHz). The winning bid of SGD105m was 3x the reserve price (SGD35m) and a 64% premium to the reserve price of the General Spectrum Auction (GSA), which would be held in 1Q17.
- TPG can still bid for an additional 15MHz spectrum at the GSA based on the 75MHz spectrum cap imposed by the regulator. The beachfront asset for the GSA remains the 700MHz band, for which we expect bidders to compete aggressively, given its superior propagation.
Not plain sailing.
- In our view, the relatively onerous conditions imposed by the IMDA would make it difficult for TPG to pose any significant challenge to the incumbents over the next 6-12 months.
- A key impediment remains the lack of a domestic roaming arrangement (prohibited by the regulator) that would have allowed a new operator to expand coverage swiftly by riding on existing network infrastructure.
- TPG is required to meet nationwide outdoor coverage within 18 months of the spectrum commencement date (or by Sep 2018). By Sep 2019, its coverage would have to blanket tunnels and in-building with underground MRT stations to be covered by end-Sep 2021.
Maintain NEUTRAL – valuations are fair with sector dividend yields at over 6% for FY17F.
- SingTel remains our preferred sector pick, with over 70% of its valuations and EBITDA backed by mobile assets outside Singapore.
- Our forecasts on the telcos have factored in the fourth entrant (we take the opportunity to further adjust our core earnings forecasts for FY18-19 for StarHub and M1 to err on the conservative).
- Our NEUTRAL ratings on both stocks are maintained, as valuations are at -1SD of their historical 5-year EV/EBITDA mean following the sharp 25-28% sell-down YTD.
- Share prices are also supported by prospective average dividend yields of 7%.