DBS Group Research 2015-07-08 (Telco): M1 - Negatives are priced in for IDA’s proposals on 4th telco. Maintain BUY.

IDA’s proposals on 4th telco 

  • 4th telco can start at the earliest in April 2017 although IDA will auction spectrum at a 60% lower reserve price in early 2016. 
  • With no other special concessions and limited capex budget, our assumption of 7% revenue share for the 4th telco by 2022 may prove too optimistic. 
  • Negatives are priced in for M1 and we like it for its 6.1% yield. 

IDA has launched public consultation before finalising auction rules in Dec 2015. 

  • IDA proposes to set aside 60 MHz of spectrum across 2.3GHz, 900MHz and 700MHz bands at a reserve price of S$40m, which is 60% lower than normal price and our expectations. 
  • If both Consistel and MyRepublic bid for this spectrum, the price could rise though. 2.3GHz & 900MHz bands will be available from April 2017 onwards while 700 MHz band from 2018 onwards.
  • Existing telcos have 2-years to adjust their offerings and cost structure. 

Without special concessions, capex could be a limiting factor. 

  • MyRepublic’s demands for mandated roaming and site sharing have not been accepted by IDA. Plus IDA has proposed that 4th telco must complete nationwide coverage by Sep 2018 implying within 18 months. 
  • There will be a phased implementation of quality of service, although details are not disclosed yet. 
  • Without these special concessions, MyRepublic’s capex budget of only US$250-300m seems low versus IDA’s capex estimate of US$300m-700m for initial years. 
  • MyRepublic targets 10-12% revenue share in the long term. 
  • Meanwhile, MyRepublic has garnered less than 4% revenue share in the fixed broadband market over the last 5 years despite getting access to a world class network. 

In Malaysia, the 4th mobile player - U Mobile - has captured only 6-7% revenue share after six years. 

  • Moreover, Singapore is a post-paid dominated market with upfront handset subsidies, multi-product bundling and 2-year contracts. 
  • While 4th telco, Illiad in France, achieved 15% subscriber share in 3- years it was largely due to mandated roaming allowing it to invest in most profitable areas only. 
  • As such, our assumption of 7% revenue share for the 4th telco by 2022 may prove too optimistic. 
  • We modelled a 10% adverse impact on M1’s revenue in 2022 and a 4% adverse impact on StarHub’s revenue 
  • Maintain BUY on M1 with DCF-based (WACC 6.8%, terminal growth 1%) TP unchanged at S$3.60.

(Sachin MITTAL)

Source: http://www.dbsvickers.com/