Telecommunications Sector - UOB Kay Hian 2016-02-19: Framework For Spectrum Auction Finalised

Telecommunications Sector - UOB Kay Hian 2016-02-19: Framework For Spectrum Auction Finalised Telecommunications Sector M1 LIMITED B2F.SI  SINGTEL Z74.SI  STARHUB LTD CC3.SI 

Telecommunications – Singapore:  Framework For Spectrum Auction Finalised 

  • The iDA maintains its pro-competition stance. The spectrum set aside for the new entrant remains generous at 60MHz, comprising 2x10MHz for the 900MHz band and 40MHz for the 2300MHz band. 
  • The reserve price for the entire block of 60MHz is reduced from S$40m to S$35m. 
  • The crux remains the ability of key contenders ConsisTel and MyRepublic to raise sufficient funding for the spectrum auction and network rollout. 
  • Re-iterate top pick and BUY for Singtel. Maintain OVERWEIGHT. 


WHAT’S NEW 

  • The Infocomm Development Authority of Singapore (iDA) has reached its decision on the framework for the upcoming auction to allocate 235MHz of spectrum. 
  • The 2016 Spectrum Auction will be conducted in two stages: 
    1. The New Entrant Spectrum Auction is open to qualified bidders who are not related to existing incumbent operators and other qualified bidders. 
    2. The General Spectrum Auction is open to existing incumbent operators and successful bidder in stage A. 
  • In the event that there is no qualified bidder under stage A, the spectrum set aside for stage A will be allocated to stage B. 

• Slightly more favourable for the new entrant. 

  • We note two changes compared with the previous proposal: 
    1.  The total spectrum set aside for the potential new entrant remains unchanged at 60MHz but the composition of the spectrum has changed. The allocation for the 900MHz spectrum remains unchanged at 2x10MHz. The iDA no longer offers 2x10MHz of the 700MHz spectrum. On the other hand, the allocation for the 2300MHz spectrum has increased from 20MHz to 40MHz. 
    2.  The reserve price for the entire 60MHz block of spectrum is reduced from S$40m to S$35m. 

• Quality control through pre-qualification. 

  • The iDA has instituted a pre-qualification process to ensure that only capable and committed companies participate in the spectrum auction. The new entrant must provide evidence of technical capabilities and financial position, and submit its business plan, including service offerings. 

• Safeguard via a performance bond. 

  • The new entrant must post a performance bond of S$20m, or 5% of the budgeted capex, whichever is higher. The iDA has the right to draw on the performance bond if the new entrant misses any rollout milestones. 

• Spectrum trading is subjected to approval. 

  • The new entrant is not allowed to trade its spectrum, especially before completion of nationwide outdoor deployment by Sep 18. Spectrum trading is subjected to approval from the iDA and conformance to existing regulations on M&As. 

• Incumbents have obligations. 

  • Incumbent operators are required to provide interconnection and mobile number portability to the new entrant. They are required to negotiate in good faith with the new entrant on access to common antenna systems. 


ACTION 


• Show me the money. 

  • The crux remains the ability of key contenders ConsisTel and MyRepublic to raise sufficient funding for spectrum auction and network rollout. Unfortunately, their efforts to raise funds are affected by the current turmoil in the financial markets and fragile business confidence. 
  • We re-iterate our top-pick and BUY recommendation for Singtel. 

• Indicative timeline. 

  • The new entrant must provide expression of interest by mid-16. Stage A of the auction should be conducted in 3Q16 and stage B in 4Q16. 

M1 (BUY/S$2.52/Target: S$3.34) 

  • M1 is the most reliant on the mobile business in Singapore, which accounted for 78.3% of service revenue in 4Q15. 
  • Its 4Q15 results were in line with expectations. 
  • M1 provides an attractive dividend yield of 5.9%. 

StarHub (HOLD/S$3.49/Target: S$3.80) 

  • StarHub is susceptible to regulatory risks in Singapore with mobile accounting for 56.3% of its service revenue in 4Q15. 
  • Its 4Q15 results were lacklustre. 
  • StarHub provides an attractive dividend yield of 5.7%. 

Singtel (BUY/S$3.76/Target: S$4.42) 

  • SingTel is the least affected by regulatory risks in Singapore. 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 pre-tax profit in FY15. 
  • Its 3QFY16 results were in line with expectations. 
  • Singtel benefits from the flight to safety and quality. The stock provides an attractive dividend yield of 4.9%. 


SECTOR CATALYSTS 

  • Investors buying into Singtel as a defensive shelter. 
  • Dividend yields have recovered after the recent share price correction. 


ASSUMPTION CHANGES 

  • Our target prices are unchanged. 


RISKS 

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


PEER COMPARISON 



Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-19
UOB Kay Hian SGX Stock Analyst Report BUY Upgrade HOLD 3.34 Same 3.34
BUY Maintain BUY 4.42 Same 4.42
HOLD Maintain HOLD 3.80 Same 3.80


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