Singapore Telcos - Maybank Kim Eng 2016-06-10: Dark-Horse Hopes

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

Singapore Telcos - Dark-Horse

Getting closer to crunch time

• IDA may announce something this month on the pre-qualification of fourth MNO aspirants ahead of its spectrum auction in 3Q16. The two main aspirants, MyRepublic and Consistel, are raising funds now. 
• Our ground checks suggest that MyRepublic is finding it an uphill task despite its appointment of two major investment banks. Consistel appears to have more funding options, including vendor support from equipment suppliers. 
• We believe it could be a more rational competitor if it wins. Remain POSITIVE on the sector. 
• Prefer Singtel (BUY, TP SGD4.50) and StarHub (BUY, TP SGD4.15).

MyRepublic’s funding hiccups?

• Our ground checks suggest that MyRepublic may be finding it difficult to raise funds. Its mandate to two banks for fund-raising has lapsed without success. The media last reported in Feb 2016 that MyRepublic wanted to complete a funding round of SGD250m by April. This is now June and there has been no progress.

No news is good news for Consistel?

• Consistel, on the other hand, was reported in Mar 2016 to have secured commitments to SGD400m of the SGD1b it hopes to raise ahead of a spectrum auction by the IDA in 3Q16. It is apparently looking at a mix of funding options, including term loans and equity. Its chairman reportedly expects to secure the rest of the money by this month. 
• Our sources also indicate that it may be getting vendor support from equipment suppliers.

BUY Singtel & StarHub, M1 a dark horse

• In our view, Consistel could make a more rational competitor than MyRepublic, going by their different media tones. We are likely to remain positive on the sector if Consistel wins. But regardless of who wins, we think the risk-reward trade-off for Singtel and StarHub is favourable. 
• Maintain BUY on Singtel (TP SGD4.50) while we recently upgraded StarHub to BUY from HOLD with a TP of SGD4.15. 
• M1 remains a HOLD (TP SGD3.09) and could be a dark horse if neither MyRepublic nor Consistel manages to secure a licence.

Singtel 

Price Drivers

1. Re-rating began in 2012 on the launch of 4G services. Monetisation of previously unlimited data plans as telcos moved to pay-as-you-use plans.
2. Re-rated further on the back of a turnaround by Optus’s mobile business in Australia following the appointment of former Singtel Singapore CEO Allen Lew to head Optus.
3. Fell on concerns of more competition from a potential fourth telco. Also, signs of 4G migration plateauing amid rising interest rates.

Swing Factors

Upside

• No new competitor to take up a new mobile operator licence. The three incumbents keep their spectrum allocations, including bands reserved for fourth telco.
• AUD reverses its weakening trend against SGD. Every 1% gain in AUD translates to 0.5% gain in Optus revenue, as Optus accounts for c.55% of group revenue.

Downside

• May not be able to maintain 70% dividend payouts if it needs to reserve cash to pay for spectrum or network investments, especially if associate dividends flag.

Starhub 

Price Drivers

1. Re-rating began in 2012 on the launch of 4G services. Monetisation of previously unlimited data plans as telcos moved to pay-as-you-use plans.
2. Underperformed M1 in 2013-14 on disappointment of flat dividend, broadband price competition and ARPU erosion from shared-data plans.
3. Fell on concerns of more competition from a potential fourth telco. Also, signs of 4G migration plateauing amid rising interest rates.

Swing Factors

Upside

• No new competitor to take up a new mobile operator licence. The three incumbents keep their spectrum allocations, including bands reserved for fourth telco.
• Merger with M1 could add heft and resources to compete against Singtel and fourth mobile operator.

Downside

• Could lose some marginal mobile market share to a new entrant. M1 is expected to lose the most.

M1 

Price Drivers

1. Re-rated in 2012 on the launch of 4G services. Monetisation of previously unlimited data plans as telcos moved to pay-as-you-use plans.
2. Stock continued to rally in 2013-2014 as take-up of 4G plans remained strong despite lower data caps. Margins improved markedly from 1Q14.
3. Peaked on concerns of more competition from a potential fourth telco. Also, signs of 4G migration plateauing and rising interest rates.

Swing Factors

Upside

• No new competitor to take up a new mobile operator licence. The three incumbents keep their spectrum allocations, including bands reserved for fourth telco.
• Merger with StarHub or formulation of ways to differentiate itself permanently, easing marginalisation concerns.

Downside

• M1’s spectrum allocation is reduced if fourth telco emerges and takes up its full reserve.
• Unable to maintain 80% payouts if it needs to pay more for spectrum or network investments.
• Subscriber churns if users decide they need more than mobile and broadband. Netflix’s entry could tip the scale against M1 due to likely tie-ups with Singtel and StarHub.

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-06-10

OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 4.15 Same 4.15

BUY Maintain BUY 4.50 Same 4.50

BUY Maintain BUY 3.09 Same 3.09