Singapore Telcos - Maybank Kim Eng 2017-04-05: Tripping over General Spectrum Auction (GSA)

Singapore Telco General Spectrum Auction SINGTEL Z74.SI M1 LIMITED B2F.SI STARHUB LTD CC3.SI

Singapore Telcos - Tripping over GSA

The incumbent telcos tripped over themselves, eagerly bidding for spectrum in the General Spectrum Auction (GSA), seemingly without the inducement of newcomer TPG, which only bidded for 2.5GHz.
Final premiums for the 700MHz, the unreserved 900Mhz and the 2.5GHz spectrum are far above our assumptions.

By our estimates, M1 and StarHub will have to cut FY18E-FY19E dividends by 13-38%, leading to pedestrian yields in the low-3%.
Maintain SELL on M1 and StarHub with TPs cut 5%, and HOLD and TP on Singtel unchanged, which escaped relatively unscathed.

The IMDA has concluded Phase 1 of the GSA after three days of auctioneering.
Excess demand of 50MHz from M1, Singtel, StarHub and newcomer TPG (TPG AU, Not Rated) led to frenzied bidding for the 175MHz of spectrum available and a final price premium of 560% per lot for the non-reserved 900Mhz spectrum (with only one winner, not surprisingly the deep-pocketed Singtel), 370% for 700MHz and 297% for 2.5GHz.

The huge price of SGD132m that Singtel will pay for just one lot of 900MHz (vs the reserve price of SGD20m) suggests that the other telcos also bidded aggressively just to make it a pyrrhic victory for the winner.
To our surprise, TPG bidded for the 2.5GHz spectrum but not for the highly-coveted 700MHz, whereas the incumbents went for it aggressively, hence the final price of SGD94m a lot vs the reserved price of SGD20m.
Even without TPG, the final premiums are far ahead of our assumptions of a 50% premium for 900MHz and 2.5GHz, and 100% premium for 700MHz. It would appear the incumbents did not need the goading of the newcomer to bid aggressively as they competed heavily amongst themselves.
As a result, the spectrum bill will come up to SGD208m and SGD350m for M1 and StarHub (vs SGD109m expected for each), and SGD564m for Singtel (vs SGD188m expected).

These huge premiums will have negative repercussions for StarHub and M1 even with conservative payment schedules. Both will need to lower their dividends to keep gearing levels within what we deem to be comfort zones for them, with the result that yields will become a pedestrian 3.2-3.5% by FY19E.
Our DCF-based target prices are reduced by 5% for both StarHub to SGD2.36 and M1 to SGD1.75 (WACC 5.5% for both, and LTG of 0.5% for StarHub and 0% for M1).
Singtel is unscathed as cash on hand is more than adequate to absorb the additional spectrum cost.
We maintain our DCF-TP of SGD3.72 (WACC 5.5%, LTG 1%) for Singtel.

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-04-05

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 3.72 Same 3.72

SELL Maintain SELL 1.75 Down 1.850

SELL Maintain SELL 2.36 Down 2.490