Singtel - CIMB Research 2015-10-01: Loss of TPG not a big deal for Optus

Singtel - CIMB Research 2015-10-01: Loss of TPG not a big deal for Optus SINGTEL Z74.SI 

SingTel - Loss of TPG not a big deal for Optus 

  • Optus could lose up to 487k mobile subscribers, or 5.2% of its total base, as TPG signs MVNO deal with Vodafone. 
  • Financial impact should be much smaller. Including iiNet’s subscribers, we estimate negative impact on Optus’ EBITDA could be 1.8%. 
  • Maintain Add on SingTel with unchanged SOP-based target price of S$4.30

Optus stand to lose up to 487k mobile subscribers 

  • Announced this morning, TPG Telecom signed an MVNO deal with Vodafone, which will see the migration of its 320k mobile customers from Optus to the Vodafone network. 
  • As TPG recently acquired iiNet, Optus could also stand to lose another 167k mobile customers once iiNet’s MVNO contract with Optus expires. These 487k customers currently formed 5.2% of Optus mobile subscriber base of 9.38m. 

Financial impact would be much smaller 

  • TPG’s FY07/15 mobile revenue was only A$79.1m, with EBITDA of A$15.8m. Assuming 50% of TPG’s mobile opex of A$63.3m consist of the MVNO fees it pays to Optus, this is only equivalent to 0.4% of Optus’ FY03/15 total service revenue. 
  • As the MVNO fees largely filter straight down to EBITDA, the migration of TPG’s subscribers to Vodafone could negatively impact Optus’ EBITDA by 1.2%. 
  • If we assume the same MVNO fee per subscriber, the negative impact including iiNet could be 1.8%. 

Other mitigating factors 

  • Losing TPG as an MVNO customer may not be a big deal, as TPG has been struggling, with subscribers falling from 370k in Jan 2014 to 320k in Jul 2015. In addition, for TPG to migrate its subscribers over to Vodafone, a SIM-swap would be required, which would be an additional hassle for its customers and could take a few weeks to a couple of months to be fully completed. 
  • In the meantime, Optus can try to compel these subscribers to stay on its network. 

Maintain Add with SOP-based TP of S$4.30 

  • Coupled with the fact that Optus only accounts for 25% of SingTel’s FY16F underlying net profit, we believe this development is unlikely to have a material earnings impact on SingTel. 
  • We maintain our Add recommendation, with unchanged SOP-based target price of S$4.30. SingTel is currently trading at FY17F EV/OpFCF of 15.2x, in line with its ASEAN Telco peers, and offers attractive yields of 4.9-5.5% in FY16-18F.

FOONG Choong Chen CFA CIMB Securities | http://research.itradecimb.com/ 2015-10-01
CIMB Securities Analyst Report ADD Maintain ADD 4.30 Same 4.30