Telecommunications - UOB Kay Hian 2015-09-10: Assessing Impact From The Entry Of A Fourth Mobile Operator.

SINGTEL Z74.SI  M1 LIMITED B2F.SI  STARHUB LTD CC3.SI 

Assessing Impact From The Entry Of A Fourth Mobile Operator 

  • We have worked out the impact on earnings and target prices from the entry of a fourth mobile operator. 
  • We attribute a probability of 75% in Scenario A, where there is no new entrant, and 25% for Scenario B, for which we assume that a fourth mobile operator disrupts the status quo. 
  • SingTel remains our top pick due to growth at regional mobile associates and favourable risk-reward trade-off. 
  • We have also upgraded M1 from HOLD to BUY. 
  • Upgrade to OVERWEIGHT. 


WHAT’S NEW 


• The current outlook for telcos is fuzzy and perplexing. 

  • The confusion is centred on whether Singapore will have a fourth mobile operator commencing commercial operations in Apr 17. 

• Potential impact on earnings with the entry of a fourth mobile operator. 

  • We analyse the potential negative impact on telcos’ earnings in the event that a fourth mobile operator secures spectrum rights and successfully rolls out its mobile network. 
  1. M1 relatively likely to be more affected than StarHub.
    M1 and StarHub are susceptible to regulatory risks in Singapore with mobile accounting for 78.3% and 56.1% of service revenue, respectively, in 2Q15. We estimated that M1’s and StarHub’s 2019 net profit would decline by 32% and 25.8%, respectively, due to the entry of a fourth mobile operator. StarHub would be relatively less affected due its ability to bundle multiple services, making its subscriber base more resilient and less likely to be poached by competing mobile operators. 
  2. SingTel would be most resilient.
    SingTel is the least susceptible to regulatory risks in Singapore. We estimated that SingTel’s 2019 net profit would only decline by 2.2%. Overseas operations, comprising wholly-owned Optus and regional mobile associates Telkomsel, Bharti Airtel, Advanced Info Service and Globe Telecom, accounted for 68.6% of group EBITDA and 69.9% of group PBT in FY15. In Singapore, SingTel has a diversified base of consumer and enterprise businesses and mobile accounted for only 29.8% of operating revenue. 

• Scenario analysis - Using probability to determine weighted target prices. 

  • We have conducted a case scenario analysis based on two possible outcomes: 
    1. Scenario A - No new entrant, and 
    2. Scenario B - Fourth mobile operator disrupts the status quo. 
  • We attribute a probability of 75% for Scenario A and 25% for Scenario B. Potential new entrants face difficulty in canvassing for funds. Investors are deterred by the huge capex involved and a highly penetrated and saturated mobile market. Thus, our target prices are S$3.26 for M1, S$3.50 for StarHub and S$4.56 for SingTel. 
  • In the event that we do not have a fourth operator (Scenario A), our target prices would be S$3.58 for M1 (Upside: 23%), S$3.83 for StarHub (Upside: 6.1%) and S$4.65 for Singtel (Upside: 23.3%). In the event that a fourth operator enters the mobile market (Scenario B), our target prices would be S$2.31 for M1 (Downside: 20.6%), S$2.46 for StarHub (Downside: 31.9%) and S$4.30 for Singtel (Upside: 14.1%). 


ACTION 


• Almost out of the woods. 

  • We started the year with many investors complacent about the impact from the potential entry of a fourth mobile operator. The recent correction has skimmed the froth of share prices. SingTel remains our top pick. We have upgraded M1 from HOLD to BUY. We maintain HOLD recommendation for StarHub. 

M1 (Upgrade to BUY/S$2.91/Target: S$3.08) 

  • M1 has suffered the brunt of recent market correction and would rebound most strongly in the event that we do not have a fourth mobile operator.
  • Building wholesale revenue. M1 has entered into agreement to provide voice, SMS and data services on a wholesale basis to Liberty Wireless, an MNVO that is scheduled to commence commercial operations by end-15. 

StarHub (HOLD/S$3.61/Target: S$3.50) 

  • Bundling multiple services gives StarHub a more resilient customer base that is less likely to be poached by competing mobile operators. 
  • Valuation is less attractive given that the recent share price correction is relatively mild. 

SingTel (BUY/S$3.77/Target: S$4.56) 

  • SingTel benefitted from growth at its regional mobile associates Telkomsel, Bharti Airtel, Advanced Info Service and Globe Telecom. 
  • SingTel offers the most favourable risk-reward trade-off based on historical trading range for EV/EBITDA. Its yield spread is 1.36%, above the long-term mean of 0.96%. 


SECTOR CATALYSTS 

  • Investors buying into telcos as a defensive shelter. 
  • Dividend yields recovering after share price corrections. 


ASSUMPTION CHANGES 

  • We have revised our target prices based on our case scenario analysis. 


RISKS 


  • Entry of a fourth mobile operator that adopts low pricing to win market share.


Jonathan Koh CFA | http://research.uobkayhian.com/ UOB KH 2015-09-10
BUY Maintain BUY 4.56 Down 4.72
BUY Upgrade HOLD 3.26 Up 3.08
HOLD Maintain HOLD 3.50 Down 3.57


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