Telecommunications - RHB Invest 2016-02-19: Firing The Fourth Cylinder

Telecommunications - RHB Invest 2016-02-19: Firing The Fourth Cylinder  SINGTEL Z74.SI  M1 LIMITED B2F.SI  STARHUB LTD CC3.SI 

Singapore Telecommunication Sector - Firing The Fourth Cylinder 

  • The Infocomm Development Authority’s (IDA) decision to facilitate a new mobile network operator (MNO) has been widely anticipated by the market. 
  • While M1 is most susceptible to competitive risks given its larger domestic mobile exposure, we think the 30% slump in its share price over the past 13 months (-7% YTD) has sufficiently priced in the downside. 
  • Accumulate M1 (M1 SP, BUY, TP: SGD3.20) on sharp price pullbacks – we see execution risks for the new MNO given the onerous rollout/regulatory obligations and funding issues. Its 8x FY16F EV/EBITDA is at -1.5SD of its historical mean. 

235MHz to be allocated via an auction in 3Q16. 

  • The IDA has unveiled the framework for the auction of the 700/900/2300/2500MHz bands following two earlier public consultations in 2014/2015. The salient points include: 
    1. the facilitation of a fourth MNO (likely MyRepublic), 
    2. 60MHz of the spectrum set aside for the new MNO including 40MHz on 2.3GHz, 
    3. the reserve price for the set-aside spectrum has been fixed at SGD35m (vs the earlier SGD40m proposed) and 
    4. the imposition of spectrum caps of 20MHz for 700MHz, 10MHz for 900MHz (with new MNO)/15MHz (with no MNO) & 45MHz for 2.3GHz/2.6GHz to prevent spectrum hoarding. 
  • There will be two auction stages:
    1. a New Entrant Spectrum Auction (NESA) reserved for qualified nonMNOs and 
    2. a General Spectrum Auction (GSA), which is open to existing as well as new MNOs. 

Middle ground established. 

  • We believe the IDA has struck an equitable outcome in its objective to promote further competition and innovation in the market. 
  • While it opted to retain 60MHz of spectrum for a new MNO, it has also: 
    1. crafted a special arrangement for 5MHz spectrum in the 900MHz to be set aside for each of the three incumbents (Singtel, StarHub and M1) under the GSA and 
    2. put the entire beachfront 700MHz band up for the regular auction. 
  • We believe the 5MHz set aside would mitigate the risk of a disruption to 3G services and pre-empt quality of service issues, in addition to improving the economics of the GSA. 
  • The reserve price for the set-aside spectrum for a new MNO of SGD35m for the entire block is slightly lower than the initial SGD40m proposed. This reflects a 45% discount to the reserve price of the spectrum under the GSA (60% discount initially proposed) as the regulator took into account the financial ability of a new MNO to roll out a nationwide network. 
  • We continue to believe concerns over a fourth operator are overplayed given: 
    1. the strong bundling proposition offered by the incumbents, 
    2. the superior mobile network of existing players and 
    3. the challenges faced by the new MNO ie having sufficient financial resources to mount a nationwide mobile network and the lack of mandatory wholesale roaming access. 

Impact on the incumbents.

  • Our earnings forecasts on Singtel, StarHub and M1 have factored in ARPU dilution in the medium term from the entry of a new MNO. 
  • Given the sharp share price correction in 2015 on concerns over the potential entry of a fourth operator, we think much of the downside has been priced into the stocks. 
  • We remain NEUTRAL on Singtel and StarHub based on TPs of SGD3.70 and SGD4.06 respectively. 
  • While M1 is the most susceptible to competitive risks, its share price has slumped 30% over the past 13 months (-7% YTD) relative to StarHub’s -16% and Singtel’s -4%. 
  • We advise investors to accumulate M1 on any sharp share price pullbacks as the latest developments merely reaffirm what has been well postulated by the market over the past 12-15 months. 
  • We continue to see execution risks for the new MNO, given the onerous regulatory/rollout obligations and funding related issues.

Singapore Research Team RHB Research | http://www.rhbinvest.com.sg/ 2016-02-19
RHB Research SGX Stock NEUTRAL Maintain NEUTRAL 3.70 Same 3.70
BUY Maintain BUY 3.20 Same 3.20
NEUTRAL Maintain NEUTRAL 4.06 Same 4.06