Telecommunications Sector - UOB Kay Hian 2016-03-28: Building Up To A Crescendo

Telecommunications Sector - UOB Kay Hian 2016-03-28: Building Up To A Crescendo Telecommunications Sector M1 LIMITED B2F.SI  SINGTEL Z74.SI  STARHUB LTD CC3.SI 

Telecommunications – Singapore: Building Up To A Crescendo 

  • Newsflow on Consistel and MyRepublic will intensify as we approach the deadline to provide expression of interest by mid-16. We re-examine our best and worst case scenarios and risk-reward trade-offs. 
  • Re-iterate BUY for Singtel as its mobile business in Singapore accounts for only 7% of total revenue if we include the proportionate share of associates’ revenue. 
  • Downgrade StarHub to SELL as it does not have the flexibility to trim cost of content, which is locked in multi-year contracts. 
  • Maintain OVERWEIGHT. 


WHAT’S NEW 


  • Competition is heating up in the race to be the fourth mobile operator in Singapore:

ConsisTel’s OMGTel appoints heavyweight CEO. 

  • ConsisTel has appointed William "Bill" Amelio as CEO of subsidiary OMGtel. Bill has vast experience with consumeroriented technology companies. He is well known as the CEO of Lenovo, who successfully integrated Lenovo with IBM's PC division. He had also held leadership positions at CHC Helicopter, Dell, NCR, Honeywell and IBM. 
  • OMGTel plans to build a high-speed 4.5G mobile network with comprehensive coverage. It has designed the network, completed an implementation plan and identified its leadership team. It is able to move immediately to the execution phase upon securing spectrum during the upcoming auction. 
  • OMGTel intends to introduce innovative new service offerings to consumers in Singapore. It aims to be a top-2 player with double-digit market share. 
  • OCBC was appointed as the advisor. OMGtel aims to raise S$1b to build the best mobile network in Singapore. Management says it is close to finalising funding for S$400m. 

MyRepublic focuses on data-only plans. 

  • MyRepublic has unveiled its mobile service plans for pre-registration and feedback. It intends to offer two data-only packages: 
    1. 2GB data-only plan at a monthly subscription of S$8 (existing fibre broadband customers: S$6) and excess data charges also at S$8/GB. 
    2. Unlimited data-only 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 break even within three years of securing its spectrum. 
  • MyRepublic has hired DBS and Goldman Sachs to raise S$250m, comprising equity of S$150m and debt of S$100m. It is said to have secured two-third of the equity portion. Its financial backers include Sinar Mas, who previously invested S$24m in MyRepublic. 



ACTION 


Reassessing the risk-reward trade-off. 

  • The deadline for key contenders MyRepublic and ConsisTel to provide expression of interest by mid-16 is fast approaching. Stage A of the auction (New Entrant Spectrum Auction) should be conducted in 3Q16 and stage B (General Spectrum Auction) in 4Q16. 
  • We re-examine our best- and worst-case scenarios for telcos: 
    1. Best-case scenario – No new entrant. No potential new entrants step forward to bid for spectrum during the upcoming auction. 
    2. Worst-case scenario – Fourth mobile operator disrupts status quo. A new entrant raises sufficient funding, meets IDA’s qualifying criteria, secures 60MHz of spectrum during the New Entrant Spectrum Auction, rolls out its mobile network and commences commercial operations on schedule in Apr 17. 
  • We assigne a probability of 50% for both scenarios. 

M1 (BUY/S$2.70/Target: S$3.02) 

  • M1 is most reliant on the mobile business in Singapore, which accounted for 80.5% of service revenue in 4Q15. 
  • Our probability-weighted target price is S$3.02 (best case: S$3.89, worst case: S$2.14). The risk-reward trade-off is favourable with potential upside of 44.1% vs potential downside of 20.7%. 
  • Share price would drop 19.3% to S$2.18 if the stock is to provide FY19F dividend yield at 5.5% if there is a fourth mobile operator. 

StarHub (Downgrade to SELL/S$3.36/Target: S$3.03) 

  • StarHub is susceptible to regulatory risks in Singapore, with mobile accounting for 55.6% of its service revenue in 4Q15. 
  • Our probability-weighted target price is S$3.03 (best case: S$3.75, worst case: S$2.30). The risk-reward trade-off is unfavourable with potential upside of 11.6% vs potential downside of 31.5%. 
  • Share price would drop 13.4% to S$2.91 if the stock is to provide FY19F dividend yield at 5.5% if there is a fourth mobile operator. 

Singtel (BUY/S$3.82/Target: S$4.41) 

  • Mobile business in Singapore accounts for 13% of group revenue (7% if we include the proportionate share of associates’ revenue). 
  • Our probability-weighted target price is S$4.41 (best case: S$4.46, worst case: S$4.35). The potential upside of ranges from 13.9% to 16.1%. 
  • Share price would gain 8.9% to S$4.16 if the stock is to provide FY20F dividend yield at 5% if there is a fourth mobile operator. 

SECTOR CATALYSTS 

  • Investors buying into Singtel as a defensive shelter. 
  • Dividend yields recover after share price correction. 

ASSUMPTION CHANGES 

  • Our target prices are revised accordingly as we believe the probability of having a fourth mobile operator has increased from 25% to 50%. 

RISKS 

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


PEER COMPARISON 






Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-28
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.02 Down 3.34
BUY Maintain BUY 4.41 Down 4.42
SELL Downgrade HOLD 3.03 Same 3.80


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