M1 LIMITED
B2F.SI
STARHUB LTD
CC3.SI
Telecom Sector - Why a Price War Now?
- Effective pricing for higher-end data plans slashed by 25-50% even before the spectrum auction in 3Q16.
- Intention to discourage the entry of new player even at the cost of near-term revenue; FY16F earnings may be reduced 5-8% for M1 and StarHub in our estimates.
- Maintain FULLY VALUED on StarHub and HOLD on M1.
What’s new?
- Singapore’s incumbent mobile players have slashed mobile data prices for post-paid users whereby effective monthly pricing for higher-end data subscribers (5GB plus) will decrease by 25%-50%. For example, subscribers can raise their data allowance by 2GB-3GB on their postpaid plans by paying only S$5.90 now versus S$21-32 earlier.
- Besides, M1 has also introduced new S$15 and S$20 post-paid SIM-only plans to defend its share of low-end data subscribers (< 2GB data usage/month) in case there is a new player in the market.
Our View
Why a price war now as the entry of a new player is not confirmed as yet?
- By starting the price war even before the spectrum auction in 3Q16, existing players are signaling to the potential new player that they will defend their market share even at the expense of revenue.
- The upsized data plans address the threat to the higher-end data users while cheaper SIM-only plans by M1 address the threat to the low-end data users. Hence the intention of the price war seems to be to discourage the new player from entering the market (MyRepublic has often mentioned of capturing 9-10% revenue share in the medium term and is trying to secure funding for the license and network rollout).
What does it mean for near-term earnings in FY16F?
- M1’s postpaid plan with 5GB of data, for example, will cost S$47.90 to consumer versus the existing cost of S$63.40, or about 25% lower (see table below).
- In some other high-end data plans, effective downward revision in pricing is over 50% and this may lead to lower revenue from high-end data users. Revenue is likely to suffer due to cheaper data rates, but handset subsidies are also likely to decline as the new entrant may compete in the SIM-only segment.
- We estimate that FY16F earnings could be revised down 5-8% for StarHub and M1 if their revenues decline 2-4% in FY16F due to these plans.
What should investors focus on?
- Investors should focus on the potential entry or non-entry of a new player rather than weak FY16F earnings as the former may have an adverse impact on earnings for many more years.
- We maintain FULLY VALUED on StarHub with TP of S$3.30 and HOLD on M1 with TP of S$2.60.
Our base-case TP is S$2.60 for M1 (bear-case TP is S$2.20, bull-case TP is S$3.40).
- Our base-case TP of S$2.60 assumes a 10% adverse impact on M1’s revenue in 2022 due to the entry of a fourth player, compared to its revenue in 2015.
- EBIT margins may fall to 16% versus 20% currently.
- Under our bear-case scenario, we assume a 12% adverse impact on revenue in 2022, with EBIT margins dropping to 15%. Our bear-case TP is S$2.20.
- Under our bull-case scenario, we assume that there is no entry of a fourth telco and no adverse impact on M1’s revenue in 2022, although EBIT margins may slip to 19%. Our bull-case TP is S$3.40.
Our base case TP is S$3.30 for StarHub (bear-case TP is S$3.00, bull-case TP is S$4.10).
- Our base-case TP of S$3.30 assumes a 4% adverse impact on StarHub’s revenue due to the fourth player in 2022, with EBIT margins falling to 18% versus 20% currently.
- Under our bear-case scenario, we assume a 6% adverse impact on revenue in 2022, with EBIT margins dropping to 17%. Our bear-case TP is S$3.00.
- Under our bull-case scenario, we assume that there is no entry of a fourth telco and no adverse impact on StarHub’s revenue in 2022, although EBIT margins may slip to 19%. Our bull-case TP is S$4.10.
Sachin MITTAL
DBS Vickers
|
http://www.dbsvickers.com/
2016-03-11
DBS Vickers
SGX Stock
Analyst Report
2.60
Same
2.60
3.30
Same
3.30
