Mobile Telco - CIMB Research 2016-02-19: A step closer to entry of new mobile player

Mobile Telco - CIMB Research 2016-02-19: A step closer to entry of new mobile player M1 LIMITED B2F.SI  STARHUB LTD CC3.SI 

Telco - Mobile A step closer to entry of new mobile player 

  • IDA makes final decision on upcoming spectrum auctions, i.e. to be held in 3Q16. 
  • IDA excludes 700MHz from spectrum package for new MNO, but not a major loss. 
  • Incumbents unlikely to overbid in general spectrum auction due to spectrum caps. Maintain sector Neutral. 
  • SingTel is our preferred Singapore telco pick. 

IDA makes final decision on the upcoming spectrum auctions 

  • The Infocomm Development Authority (IDA) has made a final decision on the new entrant spectrum auction (NESA) and the following general spectrum auction (GSA), both of which will be held in 3Q16. 

What’s new? 

  • In terms of spectrum for NESA, IDA has maintained 2 x 10Mhz at 900MHz but excluded 2 x 10MHz at 700MHz. Instead, it has raised the amount of spectrum allocated at the 2.3GHz band from 20MHz to 40MHz. Reserve price for the entire package is now S$35m (previous: S$40m) due to the change in the package composition. This is a 45% discount (previously 60%) to the reserve price in the GSA. 
  • IDA’s pre-qualification requirements for prospective bidders include providing evidence of technical capabilities and financial position. It will also review their business plans and service offerings. Bidders must submit a banker's guarantee equivalent to the reserve price and pay a performance bond (5% of capex or S$20m, whichever is higher). Spectrum right holders are disallowed from spectrum trading. 
  • The new mobile network operator (MNO) will be required to also provide Voice and SMS services but IDA will leave it to the new MNO to decide on the best approach to provide such services (e.g. by LTE or wholesale arrangements). 
  • Rollout obligations have been refined: nationwide outdoor coverage within 18 months from start of spectrum rights (i.e. Apr 2017), 30 months for road tunnels and inbuilding and 54 months for underground MRT stations/line services coverage. 
  • Reserve price for the GSA is the same as before, except for 2.3/2.5GHz where it has been lowered to S$3m (previous: S$5m). The IDA has set spectrum caps of 2 x 20MHz for 700MHz and 2 x 10MHz for 900MHz. 
  • To ensure incumbents have sufficient 900MHz spectrum to provide mobile services, IDA has set aside 2 x 5MHz for each. This leaves effectively only 2 x 5MHz to bid for. 

Our comments 

  • IDA’s decision was expected except for the change in the spectrum package composition for NESA. While the 700MHz is valuable, we think the exclusion is not a major loss as the new MNO can use the 900MHz for coverage purposes, while the extra 20MHz at 2.3GHz is extra capacity. In carrier aggregation mode, the spectrum can provide peak speeds of up to 295Mbps, which helps the new MNO compete. 
  • For the GSA, we believe there is low risk of the incumbent MNOs paying very high prices for spectrum, given the spectrum caps that have been put in place by the IDA. 
  • Our views remain unchanged. M1 stands to lose the most from new competition given its purely Singapore and largely mobile focus, followed by StarHub (mobile forms c.70% of its FY16F EBITDA). Maintain Hold on both companies. SingTel will be the least impacted as we estimate its Singapore mobile business only accounts for c.11% of group FY03/16 EBITDA. It remains our preferred Singapore telco pick.

Highlighted Companies

M1 Limited HOLD, TP S$3.10 

  • We expect M1 to be the hardest hit by new competition, given its purely Singapore and largely mobile focus, its relatively higher prepaid revenue mix and inability to bundle pay TV services in a quad-play offering. 

SingTel ADD, TP S$4.50 

  • Among its local peers, SingTel is the least at risk of being negatively affected by the entry of a fourth mobile operator in Singapore due to its diversified operations. 
  • We forecast overall core net profit to grow by a decent 6.0% in FY17 and 5.6% in FY18. 

Starhub HOLD, TP S$3.60 

  • StarHub should be less at risk vs. M1 from new competition, as the mobile business accounts for a lesser 70% of its EBITDA and given its ability to bundle quad-play services. 
  • Nevertheless, we expect flat EBITDA and 2.3% decline in core net profit in FY16.

FOONG Choong Chen CFA CIMB Securities | http://research.itradecimb.com/ 2016-02-19
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 3.10 Same 3.10
HOLD Maintain HOLD 3.60 Same 3.60
ADD Maintain ADD 4.50 Same 4.50