Singtel - UOB Kay Hian 2016-01-07: Factoring In Reduced Contributions From AIS

Singtel - UOB Kay Hian 2016-01-07: Factoring In Reduced Contributions From AIS SINGTEL Singapore Telecommunications Z74.SI 

Singapore Telecommunications (ST SP) - Factoring In Reduced Contributions From AIS 

  • AIS has secured 15MHz of the 1800MHz frequency band at a reasonable price of Bt41b. It was disciplined and exited the race when bidding became irrational for the 900MHz frequency band. 
  • The negative impact on Singtel is manageable as AIS accounted for only 6.4% of group PBT in FY15. 
  • We have cut our earnings forecast for Singtel by 3.8% for FY17. 
  • Maintain BUY but lower target price to S$4.42. 


WHAT’S NEW 


• Unexpected outcome from 4G auctions. 

  • There were two separate 4G auctions. True Move and Advanced Info Service (AIS) each secured 15MHz of the 1800MHz frequency band at Bt39.8b and Bt41b respectively during the first auction conducted in November. 
  • Competition became more intense during the second auction in December. Jasmine and True Move each secured 10MHz of the 900MHz frequency band at much higher prices of Bt75.7b and Bt76.3b respectively, which are 5.9x the reserve price. 

• True Move has won the lion’s share of available spectrum. 

  • Conversely, DTAC surprisingly did not secure any spectrum during both auctions. The auctions also witnessed the entry of Jasmine as the fourth mobile operator in Thailand. 

• AIS’ game plan. 

  • AIS has 15MHz of spectrum each for the 1800MHz and 2100MHz frequency bands, adequate for providing quality mobile broadband services. It has access to Telephone Organisation of Thailand’s (TOT) 15MHz of spectrum on the 2100MHz frequency band. 
  • AIS has signed a MOU for a partnership with TOT. It will build a mobile network for TOT and could lease up to 80% of network capacity for 10 years till 2025. 

• Alternative strategies to overcome adversary. 

  • AIS plans to utilise its budget of Bt75b for the 900MHz spectrum auction to expand its 3G and 4G networks on a nationwide basis and maintain the premium quality of its services. 
  • It will give free 3G/4G smartphones to 10.5m 3G customers who are still using 2G featured phones and 1.5m 2G customers on the 900MHz frequency band, subject to top-ups of Bt100, Bt790, Bt990, or Bt1,290 depending on the handset models. 


STOCK IMPACT 


• Singtel owns a 23% stake in AIS...

  • ... accounting for 20.3% of contributions from regional mobile associates and 6.4% group of PBT in FY15. AIS provided dividends of S$314m to Singtel, which forms 8.3% of group net profit in FY15. 

• Satisfactory outcome for AIS. 

  • We view that management at AIS has exercised careful discretion and acted in the best interest of shareholders. It secured 15MHz of the 1800MHz frequency band at a reasonable price of Bt41b, which gave it the flexibility/option to forgo bidding for the 900MHz frequency band when competition became irrational. 

• Potential delays to the 4G auctions have previously casted a shadow over AIS. 

  • With the 4G auctions completed, the overhang on AIS from regulatory uncertainties involving access to spectrum has been removed. 


EARNINGS REVISION/RISK 

  • Our Thai Telco Analyst Chaiwat Arsirawichai has cut earnings estimates for AIS by 25.6% for 2016 due to: 
    1. expenses from the 2G handset subsidy programme, 
    2. a 5% yoy decline in ARPU due to the increasingly competitive environment, and 
    3. increase in SG&A/sales from 16.5% to 23% due to higher marketing expenses. 
  • We have correspondingly reduced our net profit forecasts for Singtel by 3.8% for FY17 and 3.5% for FY18. 


VALUATION/RECOMMENDATION 

  • We lower our target price slightly from S$4.56 to S$4.42, based on DCF (required rate of return: 5.8%, terminal growth: 1.0%). 

SHARE PRICE CATALYST 

  • Singtel is the least affected by a fourth mobile operator in Singapore as overseas businesses accounts for about 70% of its bottom-line. 
  • Singtel will benefit from growth at its regional mobile associates, such as Telkomsel in Indonesia, Bharti Airtel in India, Advanced Info Service in Thailand and Globe Telecom in the Philippines. 
  • Singtel is the largest and most liquid defensive stock listed on the Singapore Exchange and deserves to trade at a premium.



Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-07
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.42 Down 4.56


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