Telco - CIMB Research 2017-04-05: Shockingly high final spectrum prices in GSA

IDMA Spectrum Auction Singapore Telcos SINGTEL Z74.SI M1 LIMITED B2F.SI STARHUB LTD CC3.SI

Telco - Overall - Shockingly high final spectrum prices in GSA

Spectrum winners and bandwidth allocation in GSA were largely within expectations.
However, final spectrum prices were shockingly high, with the 700MHz and 900MHz at 4.7x-6.6x their reserve prices.
Maintain Underweight sector call.

We keep our Add rating on Singtel, which will be least impacted by the GSA given its strong balance sheet.

The Infocomm Media Development Authority (IMDA) has announced the winning bidders of the General Spectrum Auction (GSA) after the quantity stage which was conducted between 30 Mar and 4 Apr. Next, the winning bidders will negotiate among themselves to determine their exact individual spectrum lots.
Singtel won the maximum allowable spectrum (i.e. 75MHz) for S$563.7m, while StarHub won rights to a total 60MHz of spectrum for S$349.6m, across the 700MHz, 900MHz and 2500MHz bands. M1 grabbed 30MHz of bandwidth in 700MHz and 900MHz for S$208.0m but did not win any spectrum in 2500MHz.
Bandwidth allocations were largely within our expectations, with the Big Three denying TPG the 700MHz, although
1. Singtel got 10MHz more bandwidth in the 700MHz at the expense of M1 and
2. TPG won 5MHz less bandwidth in 2500MHz.

Due to aggressive bidding, the final price of the 700MHz was 4.7x the reserve price of S$20m/10MHz, much higher than our base case of 1.5x. We believe this was due to Singtel’s desire to get more spectrum than its peers to keep a competitive edge in the IoT/5G era, while TPG may have also helped push bids higher.
Even for the 900MHz spectrum, the final price for the 10MHz bandwidth that did not fall under the First Right of Refusal (FROR) portion was 6.6x the reserve price of S$20m. We had expected bidders to pay the reserve price given
1. TPG’s ineligibility to bid for more 900MHz,
2. Singtel/StarHub were merely retaining their existing holdings and
3. M1 could ‘live’ with 2x5MHz (for 3G) after its 2G network shutdown.

While the final spectrum prices are shockingly high and Singtel won the rights to more bandwidth than expected in 700MHz and 2500MHz, we estimate this would only impact its SOP-based fair value by S$0.03/share (-0.7%). Meanwhile, its net debt/EBITDA would only rise to 1.37x/1.34x at end-FY18/19F, vs. our current forecast of 1.35x/1.28x.
For StarHub, we estimate the higher-than-expected spectrum cost would hit its DCF-based fair value by S$0.15/share (-5.8%), while its net debt/EBITDA at end-FY17/18F would rise to 1.3x/1.6x vs. our current forecast of 1.2x/1.3x. While this is still within manageable levels, it may spark concerns over the sustainability of its revised S$0.16 DPS for FY17F if StarHub wants to keep its net debt/EBITDA within 1.0x-1.5x.
For M1, the high final spectrum prices are somewhat offset by lower-than-expected bandwidth won in the 700MHz and none in 2500MHz. We estimate its DCF-based fair value would be impacted by S$0.06/share (-3.3%). Net debt/EBITDA would rise to 1.4x/2.0x at end-FY17/18F vs. our current forecast of 1.4x/1.7x, which could also spark concerns among investors over its current 80% payout ratio.

Maintain Underweight on Singapore telcos due to the negative earnings outlook over the medium term.
We keep our Add rating on Singtel and Reduce ratings on M1 and StarHub.
We make no changes to our earnings forecasts and target prices, although the higher-than-expected final spectrum prices are certainly another negative development for the sector, especially for the smaller players.

REDUCE, TP S$1.80, S$2.16 close
We expect M1 to be the hardest hit by new competition given its focus on Singapore and mobile, its relatively higher prepaid revenue mix, and inability to bundle pay TV services in a quad-play offering.

ADD, TP S$4.10, S$3.92 close
SingTel is the least at risk among its local peers of being negatively affected by the entry of a fourth mobile operator in Singapore due to its diversified operations. We forecast core net profit to be flat in FY17F, and inch lower by 1.5% in FY18F.

REDUCE, TP S$2.60, S$2.88 close
StarHub should be less at risk than M1 from new competition, as the mobile business accounts for a relatively smaller 71% of its EBITDA and given its ability to bundle quadplay services. Nevertheless, we expect EBITDA/core EPS to fall by 8.7%/17.9% in FY17F.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2017-04-05

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 4.100 Same 4.100

REDUCE Maintain REDUCE 1.800 Same 1.800

REDUCE Maintain REDUCE 2.600 Same 2.600