Telecommunications Sector - UOB Kay Hian 2016-04-13: ConsisTel/OMGtel – Key Contender To Be The Fourth Telco

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Telecommunications Sector M1 LIMITED B2F.SI  SINGTEL Z74.SI  STARHUB LTD CC3.SI 

Telecommunications – Singapore: ConsisTel/OMGtel – Key Contender To Be The Fourth Telco 

• ConsisTel’s subsidiary OMGtel has hired heavyweight CEO Bill Amelio. 
• Management has made earnest preparation to design and roll out a high-speed 4.5G mobile network. 
• OMGtel aims to surpass competitors for in-building coverage and to surprise Singaporeans with innovative and differentiated service offerings. 
• We assess OMGtel to be a credible threat. 
• Our recommendation for the sector is Under Review as we monitor progress of fund raising at ConsisTel/OMGtel and MyRepublic. 

WHAT’S NEW 

• We met ConsisTel/OMGtel, a key contender to be the fourth mobile operator in Singapore, and also attended their media briefing. 
• Appoints heavyweight CEO to helm OMGtel. ConsisTel has appointed William "Bill" Amelio as CEO of subsidiary OMGtel. Bill has vast experience with consumer-oriented 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. 
• Bill will be based full-time in Singapore upon OMGtel completing pre-qualification and securing spectrum during the upcoming auction in 3Q16. Bill is no stranger to Singapore. He was based in Singapore when he was Senior Vice President, Asia Pacific and Japan, at Dell with responsibility for strategy and operations during 2001-05. He was also on the board of directors for Infocomm Development Authority (iDA) during 2007-09. Bill is active in philanthropy. He is chairman of Caring for Cambodia (CFC), a non-profit charitable organisation that provides free education to impoverished children. 
• Bill relishes the challenge to establish the fourth telco in Singapore. His interest is fully aligned with OMGtel’s shareholders as he will be incentivised through stock options. 
• Ready to roll out high-speed 4.5G mobile network. OMGTel plans to build a comprehensive high-speed 4.5G mobile network based on LTE Advance technology, independent of incumbents’ networks. 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. 
• ConsisTel specialises in in-building wireless communications systems and has experiencing installing distributed antenna systems for over 800 commercial buildings in Singapore. OMGtel plans to provide unrivalled in-building coverage using multiple-input and multiple-output (MIMO) antennas for genuine 4G coverage. It would also have access to common antenna systems (CAS) that incumbent mobile operators have installed in newly-built commercial buildings as regulated by iDA. 
• OMGtel has entered into a mobile backhaul services agreement with SP Telecommunications, which provides optical networks. It will also tap on Next Generation Nationwide Broadband Network (NGNBN) to augment its backhaul transmission network and also to add redundancy. 
• Aims to introduce differentiated packages. OMGtel intends to introduce innovative new service offerings to consumers in Singapore. It aims to be a top-2 player with doubledigit market share. 
• Making good progress in fund raising. OCBC has been appointed as the financial advisor. OMGtel aims to raise S$1b to build the best mobile network in Singapore. According to management, OMGtel is close to finalising funding for S$300m-400m. 

ACTION 

• Assessing 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 have assigned a probability of 50% for both scenarios. 

M1 (BUY/S$2.47/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 57.5% vs potential downside of 13.4%. 

StarHub (SELL/S$3.30/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 13.6% vs potential downside of 30.3%. 

Singtel (BUY/S$3.69/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 17.9% to 20.9%. 

SECTOR CATALYSTS 

• Investors buying into Singtel as a defensive shelter. 
• Progress in fund raising at ConsisTel/OMGtel and MyRepublic. 

ASSUMPTION CHANGES 

• We maintain our existing earnings forecast and target prices. 

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/ 2016-04-13

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.02 Same 3.02

BUY Maintain BUY 4.41 Same 4.41

SELL Maintain SELL 3.03 Same 3.03