Telecommunications Singapore - UOB Kay Hian 2017-08-28: TPG Telecom – No Longer Invincible

Telecommunications – Singapore - UOB Kay Hian 2017-08-28: TPG Telecom – No Longer Invincible Singapore Telcos M1 LIMITED B2F.SI STARHUB LTD CC3.SI

Telecommunications Singapore - TPG Telecom – No Longer Invincible

  • TPG’s positioning in the budget segment does not overlap with M1’s and StarHub's focus on high-value subscribers, especially those with high-intensity usage of data.
  • Australia is TPG's primary market for mobile. Here, TPG faces challenges from the high capex required to cover the huge but sparsely-populated land mass. Its core fixed line business is also under tremendous pressure. 
  • Maintain OVERWEIGHT. Reiterate BUY for M1 (target price: S$1.98) and HOLD for StarHub (entry price: S$2.38).



WHAT’S NEW


TPG positioned as a no frills budget player. 

  • TPG Telecom (TPG) offers pre-paid SIM-only mobile plans as an MVNO hosted by Vodafone Hutchison Australia (VHA). We see TPG as a no frills mobile player in Australia, offering basic voice, SMS and data at affordable pricing. 
  • TPG’s focus on pre-paid SIM-only mobile plans also signifies its positioning in the value and budget segment of the market. It does not bundle handsets with its mobile plans.
  • TPG had 453,000 mobile subscribers as of Jan 17, representing an estimated market share of just 1.4%. We estimate TPG’s pre-paid ARPU at a maximum of A$12.43 based on financial performance in 1HFY17 (six months ending Jan 17). Telstra’s and Singtel Optus’ pre-paid ARPU were much higher at A$21.50 and A$20.00 respectively.
  • TPG may not be sustainably disruptive as Singaporean prefers post-paid mobile plans bundled with branded handsets, such as Apple iPhone 8 and Samsung S8 and Note 8. In addition, incumbent operators already offer attractively priced SIM-only mobile plans.

TPG has overpaid for spectrum in Australia. 

  • TPG and Hutchison Australia (VHA) secured spectrum in Australia during the spectrum auction for the 700MHz frequency band conducted in Apr 17. TPG secured 2x10MHz of the 700MHz spectrum at A$1.26b (A$2.75/MHz/population) while VHA secured 2x5MHz at the reserve price of A$285.9m (A$1.25/MHz/population). TPG has clearly overpaid by bidding 2.2x the price paid by competitor VHA. 
  • TPG also owns 20MHz of the 2500MHz frequency band that it secured at a much lower price of A$13.5m during the previous auction in 2013.

Setback as domestic roaming not mandated. 

  • TPG plans to roll out its own mobile network to cover 80% of the population in Australia by investing capex of A$600m over the next three years. There are criticisms that its planned 2,000-2,500 sites is not sufficient due to the huge land mass and low population density in Australia. 
  • TPG’s diversification into mobile suffered a setback in May 17 when the Australia Competition & Consumer Commission (ACCC) decided against mandated wholesale domestic mobile roaming for rural areas, citing insufficient evidence that mobile roaming would improve services and lower pricing in rural areas.

Taking NBN Co head on. 

  • TPG launched its fibre-to-the-basement (FTTB) network to cover 0.5m apartments in metropolitan cities in 2014, competing directly against government-owned NBN Co built at a cost of A$41b. In the past, politicians have criticised that TPG was allowed to cherry-pick high-margin or low-cost areas, which works against NBN Co’s effort to provide high-speed broadband for all Australians.
  • The Australian government plans to impose a levy of A$7.10/month, dubbed an NBN tax, for fixed line connections with average download speed of 25Mbps with effect from Jul 18. The levy would be utilised to subsidise broadband connections using satellite and fixed wireless for rural areas. Consumers on NBN Co’s network would not be affected as the levy is already embedded in NBN Co’s existing access charges. If imposed, the levy would hurt TPG’s EBITDA margin of 34% in 1HFY17.
  • TPG suffers a margin squeeze as customers migrate from ADSL to NBN Co connections due to NBN Co’s higher access charges. Fibre broadband via NBN Co is TPG’s fastestgrowing business with subscriber base expanding 41% hoh to 388,000, vs only 24,000 FTTB subscribers as of Jan 17. With its core fixed line business under pressure, TPG is forced to seek greener pasture in mobile.


ACTION


Battling on two fronts. 

  • TPG has upped the ante. Its operational and financial risks have increased as it rolls out mobile networks in both Australia and Singapore. It has raised A$400m from its 1-for-11.13 rights issue at A$5.25 to finance the expansion in Apr 17. Execution risk has increased as its business model becomes more complex.
  • Comparatively, Australia would be TPG’s core market given the size and scale of its investments in spectrum and network infrastructure. Naturally, the expansion to mobile in Singapore would be accorded a lower priority.

M1 (BUY/S$1.79/Target: S$1.98)

  • M1 will vigorously defend its market share by offering attractive packages bundled with branded handsets and generous data upsize options.
  • Our target price of S$1.98 is based on DCF (COE: 7.5%, terminal growth: 1.5%), assuming M1 and StarHub embark on network sharing. However, our target price would drop to S$1.55 if the network sharing with StarHub fails to materialise.

StarHub (HOLD/S$2.66/Target: S$2.62)

  • StarHub will vigorously defend its market share by offering attractive packages bundled with branded handsets and generous data upsize options.
  • Our target price of S$2.62 is based on DCF (COE: 6.5%, terminal growth: 1.5%), assuming M1 and StarHub embark on network sharing. However, our target price would drop to S$2.20 if the network sharing with M1 fails to materialise.


SECTOR CATALYSTS

  • M1 and StarHub collaborating on network sharing.
  • Impending entry of TPG Telecom as the fourth mobile operator in 2018.


ASSUMPTION CHANGES

  • We maintain our existing earnings forecasts, which have already factored in:
    1. higher handset subsidies due to iPhone 8 during 4Q17 and 1H18, and
    2. post-paid ARPU contracting 9.6% for M1 and StarHub during 2018-19.


RISKS

  • M1 and StarHub may not be able to close the deal or achieve the desired cost savings from network sharing.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-28
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.980 Same 1.980
HOLD Maintain HOLD 2.620 Same 2.620



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