Telecommunications Sector - UOB Kay Hian 2016-03-17: More Differentiated Services On Board

Telecommunications Sector - UOB Kay Hian 2016-03-17: More Differentiated Services On Board Telecommunications Sector M1 LIMITED B2F.SI  SINGTEL Z74.SI  STARHUB LTD CC3.SI 

Telecommunications – Singapore: More Differentiated Services On Board 

  • Incumbent mobile operators have launched add-on data and upsize options at attractive pricing. We assess the risk of customers trading down to lower-tier packages to be limited. 
  • The marketing blitz appears to be a reaction to MyRepublic’s data-only packages. 
  • Re-iterate BUY for Singtel. Maintain OVERWEIGHT. 


WHAT’S NEW 


 Competitive offers for add-on data. 

  • Singtel has launched DataX2 that doubles data allowance for new and re-contracting customers at a flat fee of S$5.90/month. For example, customers choosing the Combo 3 Plan can double their data allowance from 3GB to 6GB by paying an additional S$5.90/month over a period of 24 months. 
  • M1 has matched Singtel’s offer. It introduced Upsized Data that increase customers’ data allowance by a similar 2GB to 12GB at the same price of S$5.90/month. 
  • StarHub has also followed suit offering 3GB-for-S$3 Upsized Data option. The attractive offer effectively pricing data at S$1/GB is valid till 31 Mar 16. The usual price of S$6 applies for customers signing up from 1 Apr 16 onwards. 

 Recurrent revenue contribution from add-on data. 

  • Consumers who exceed their data allowances do so intermittently and infrequently. According to M1, average usage of data has increased 10% yoy to 3.3GB in 4Q15. Only an average of 23% of customers on tiered data plans exceed their data bundle because excess data charges are currently prohibitive at S$10.70/GB for all three operators. 
  • The affordable pricing for add-on data and upsize option provides peace of mind and could stimulate usage of data. Customers who sign up for add-on data will provide recurrent revenue over a period of 24 months. 

 Risk of customers trading down to lower-tier plans. 

  • For example, customers on Singtel’s Combo 4 plan could trade down to Combo 3 plan and utilise DataX2 increase data allowance from 3GB to 6GB. The customer’s total bill would decline by 17% from S$82.90 to S$68.80. However, the number of customers making the switch is expected to be limited due to: 
    1. Handset subsidy would correspondingly be reduced, 
    2. Voice minutes would be cut from 400 mins to 300 mins, 
    3. Data-oriented customers are incentivised to stay on their higher-tier plan to obtain a larger add-on and upsize option, and 
    4. Most customers are on Combo 2 and Combo 3 plans (S$42 and S$62 packages) and the flexibility to trade down is limited. 

 Incumbents determined to defend their turf. 

  • The competitive pricing for add-on data and upsize option could be a ploy to counter MyRepublic’s data-only plans. Incumbents Singtel, M1 and StarHub are signalling their determination to do “whatever it takes” to defend their market shares. Such aggressive posturing could foil MyRepublic and ConsisTel’s business plan and deter potential investors from investing in the two aspiring fourth mobile operators. 
  • As such, we would not rule out the possibility that incumbent mobile operators reverse course in the event that we do not have a fourth mobile operator. 

 MyRepublic sending out feelers. 

  • MyRepublic has unveiled its mobile service plans for pre-registration and feedback. It will offer two data-only packages: 
    1. 2GB data plan at monthly subscription of S$8 (existing fibre broadband customers: S$6) and excess data charges also at S$8/GB. 
    2. Unlimited data plan at monthly subscription of S$80 (existing fibre broadband customers: S$60). 
  • MyRepublic’s estimated capex is about S$300m, at the lower end of iDA’s expectations of S$300m-700m. It targets to garner 250,000 subscribers in its first year as a mobile operator (market share: 3%) and 700,000 subscribers within five years (market share: 9%). It aims to breakeven within three years of securing its spectrum. 
  • MyRepublic is said to have hired DBS and Goldman Sachs to raise S$250m, comprising equity of S$150m and debt of S$100m. 


ACTION 


 Last-ditch effort to secure financing. 

  • The crux remains the ability of key contenders ConsisTel and MyRepublic to raise sufficient funding for spectrum auction and network rollout. The new entrant must provide expression of interest by mid-16. Stage A of the auction (New Entrant Spectrum Auction) should be conducted in 3Q16 and stage B (General Spectrum Auction) in 4Q16. 

M1 (BUY/S$2.58/Target: S$3.34) 

  • M1 is the most reliant on the mobile business in Singapore, which accounted for 80.5% of service revenue in 4Q15. M1 suffered the brunt of share price correction and would rebound most strongly if we do not have a fourth mobile operator. 
  • M1’s current share price has already substantially factored in the potential damage from the entry of a fourth mobile operator. Our worst-case target price is S$2.27. 
  • M1 provides attractive dividend yield of 5.8%. 

StarHub (HOLD/S$3.38/Target: S$3.80) 

  • StarHub is susceptible to regulatory risks in Singapore with mobile accounting for 55.6% of its service revenue in 4Q15. 
  • 4Q15 results were lacklustre with mobile revenue contracting 2.3% yoy due to erosion of ARPU for pre-paid services. Pay-TV business suffered a second consecutive quarter of decline in subscriber base while higher cost of services ate into EBITDA margin. 
  • StarHub provides attractive dividend yield of 5.9%. 

Singtel (BUY/S$3.80/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. 
  • Singtel benefits from the flight to safety and quality. The stock provides attractive dividend yield of 4.9%. 


SECTOR CATALYSTS 

  • Investors buying into Singtel as a defensive shelter. 
  • Dividend yields have recovered after 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/ 2016-03-17
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 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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