Telco - CIMB Research 2016-03-15: Overall Positioning or posturing?

Telco - CIMB Research 2016-03-15: Overall Positioning or posturing? M1 LIMITED B2F.SI  STARHUB LTD CC3.SI 

Telco - Overall Positioning or posturing? 

  • Singapore telcos launched mobile data upsize promotions last week. 
  • Up to 3-4% of mobile revenue at risk over the next 2 years, but it is not a price war. 
  • Maintain sector Neutral. SingTel remains our preferred Singapore telco pick. 

Telcos launched upsize mobile data promos 

  • Last week, SingTel launched its DataX2 promo, which allows new and re-contracting subs to double their mobile data quota for a flat fee of just S$5.90/month over a 2-year contract period. 
  • Subsequently, M1 and StarHub responded with their own mobile data upsize offers. 
  • Also, M1 added two new entry-level sim-only plans (S$15/month and S$20/month) and raised the data quota on all its existing sim-only plans by 1Gb. 

Incumbents play tough as potential fourth player raises funds 

  • These came right after MyRepublic announced that it will offer a 2Gb/unlimited data plan for S$8/S$80 per month, if it becomes Singapore’s fourth mobile player. 
  • Whether the incumbents were reacting to this or not, it suggests that they will launch aggressive promos to defend market share from the potential new player, which is currently raising funds for the upcoming spectrum auction in 3Q16. 

Some mobile revenues at risk but definitely not a price war 

  • The upsize mobile data offers only apply to postpaid subs that are on the S$42/month price plans and above. We see risks of subs on the S$62/$82 per month plans downtrading by 1-tier, as they could save net S$160 over their 2-year contracts (with iPhone 6S) and get 1-2Gb extra data but with 100 fewer minutes. 
  • Assuming these subs make up 50% of the postpaid base and 50% downtrade, 2% of mobile service revenue could be at risk. Subs on higher priced plans are unlikely to downtrade given the substantial reductions in talktime allowance. 
  • Existing excess data usage revenues, which form an estimated 2-4% of mobile service revenue, may also be affected. Postpaid subs that sign-up for the promo will pay S$6/month for an extra 2-3Gb (on the most popular plans), generating 44-45% lower fees vs. S$10.70/Gb currently charged. Future incremental revenues from subs upgrading to higher priced plans could also be capped if the promo is sustained. 
  • Combined, 3-4% of mobile service revenue may be at risk but this should be partly offset by some subs that maintain their current plans and pay more to sign up for the upsize data promo. Also, any impact to telcos’ revenue and earnings will be gradual over the next two years as the promo only applies to new and re-contracting subs. 
  • On M1’s new entry-level sim-only plans, we believe M1 is sending a clear message that it can be more price competitive than MyRepublic. For example, its S$20/month plan comes with 4Gb, 150 minutes and 800 SMS. On MyRepublic’s plan, subs will need to pay S$24 for 4Gb (the extra 2Gb at S$8/Gb) without any minutes/SMS. 

Maintain sector Neutral; SingTel remains preferred pick 

  • Maintain sector Neutral. There remains a fairly high chance of a new player entering the market and that mobile ARPU could fall by 15% across 2017-20, in our view. 
  • Our top pick remains SingTel, which is least at risk from new competition. 

Highlighted companies 

M1 Limited HOLD, TP S$3.10, S$2.57 close 

  • 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, S$3.80 close 

  • SingTel is the least at risk among its local peers 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, S$3.41 close 

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

FOONG Choong Chen CFA CIMB Securities | 2016-03015
CIMB Securities 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