Telecommunications Sector Singapore - UOB Kay Hian 2016-06-28: Never Say Never

Telecommunications Sector - UOB Kay Hian 2016-06-28: Never Say Never Telecommunications Sector M1 LIMITED B2F.SI  SINGTEL Z74.SI  STARHUB LTD CC3.SI 

Telecommunications – Singapore: Never Say Never

  • Our channel checks indicate that MyRepublic and OMGtel will get their financing in place and intend to lodge their expression of interest with iDA in mid-July. 
  • The market believes the two contenders are having difficulties raising funds and even if one of them succeeds, the profitability of incumbent mobile operators would not be affected. 
  • We prefer to stay cautious and not to underestimate MyRepublic/OMGtel. 
  • Never say never to the fourth mobile operator. Maintain UNDERWEIGHT.



WHAT’S NEW

  • We met MyRepublic and ConsisTel’s subsidiary OMGtel to assess their readiness to participate in the upcoming spectrum auction.

MyRepublic – All ready to bid. 

  • We understand that MyRepublic raised S$30m in April. In addition, four serious investors, comprising one existing shareholder and three potential new investors, have offered term sheets for the equity portion of S$150m. MyRepublic would select one of them to be its strategic partner in July. Nevertheless, management cautioned that the funds would be raised in a series of tranches over time.
  • We understand that existing shareholders Sinar Mas and Xavier Niel (founder of Free Mobile, the fourth mobile operator in France) have decided to reinvest in MyRepublic.

OMGtel – All ready to bid. 

  • We understand that OMGtel has already raised more than S$60m, the minimum required to bid during the upcoming auction (reserve price $35m + performance bond S$25m). In addition, there are another two big investors potentially coming on board in July, a large listed local company (non-government linked) and an international private equity company. The equity portion of its fund-raising exercise is S$300m-400m. Bill Amelio came on board at the right time in March and he attended all the presentations to investors organised by OCBC.
  • OMGtel's main equipment vendor is working closely with a Chinese bank to provide financing with a tenure of more than five years. However, OMGtel's preference is to work with a panel comprising both local and foreign banks.

Key contenders: “Game on”. 

  • We understand that both MyRepublic and OMGtel intend to lodge their binding expression of interest with iDA in mid-July (three weeks from now). iDA is expected to release the results of the pre-qualification in early-August (six weeks from now).
  • We understand that iDA conducted the New Entrant Information Session in May. iDA briefed MyRepublic and OMGtel on the procedures for bidding and they were given the opportunity to clarify any matters relating to the auction rules. iDA also conducted a training session on the auction procedures after the information session.

Show me the bank guarantees. 

  • We anticipate New Entrant Spectrum Auction (stage A) will be conducted in September and General Spectrum Auction (stage B) in October. The new entrant spectrum auction will be conducted using the multiple round auction format. Bidders must provide iDA with bank guarantees covering the amount they have bidden in each and every round of the auction. Thus, key contenders have to bid within the financial resources available to them.

Working hand in hand with equipment suppliers. 

  • Our channel checks suggest that equipment vendors Nokia, Huawei and ZTE have bidden for contracts from MyRepublic and OMGtel. It is also an industry practice for equipment vendors to have tie-ups with banks to provide equipment financing.


ACTION


A culture of disbelief. 

  • Many investors have started to punt on the possibility of status quo with no new entrant by buying M1 and StarHub.
    1. There seems to be an ongoing campaign of disinformation. Many investors believe that MyRepublic and OMGtel are having a lot of difficulties raising funds. There is even a malicious rumour that MyRepublic has gone bankrupt.
    2. Some investors even believed that the fourth mobile operator would not affect the profitability of incumbent mobile operators due to poor execution.

Risk of intensified competition to secure more spectrum. 

  • StarHub has amassed a war chest after raising S$300m through its medium-term note programme in May 16. This could signify a change to the previous cosy oligopoly. Thus, competition could intensify during the general spectrum auction (stage B) that will be conducted in Oct 16.

Assessing impact on earnings. 

  • We analyse the impact on earnings in the event that a fourth mobile operator secures spectrum rights and successfully rolls out its mobile network.
  • Our key assumptions are as follows:
    1. The fourth mobile operator commences commercial operations on 1 Apr 17.
    2. The fourth mobile operator focuses primarily on securing post-paid subscribers, which is a more lucrative market with higher ARPU.
    3. The fourth mobile operator prices its post-paid mobile services at about a 20% discount to M1. Its post-paid ARPU is therefore assumed to be S$49.60 compared with S$62 for M1, S$70 for StarHub and S$74 for Singtel. We have assumed that incumbent mobile operators’ post-paid ARPU would drop 5% p.a. over a two-year period. Thus, post-paid ARPU would drop 10% during the two- year period after the fourth mobile operator commences operations.
    4. Post-paid subscriber base for the industry expands at 3% p.a. We have assumed that new subscribers added to the industry sign up with the fourth mobile operator. We have also assumed that M1’s post-paid subscriber base declines 2% p.a. over a two-year period. Conversely, we have assumed a smaller contraction of 1% p.a. for StarHub and Singtel due to their ability to bundle multiple services. We have assumed that existing subscribers lost by M1, StarHub and Singtel switch over to the fourth mobile operator. Based on our assumed scenario, we have modelled that the fourth mobile operator secures a market share of 9.1% two years after commencing operations.
    5. Incumbent mobile operators would cut operating expenses to maintain stable JAWS, ie trimming expenses in line with the anticipated drop in service revenue.
    6. Projected capex remains at the same level, unaffected by the entry of a fourth mobile operator. Thus, depreciation is an invariable fixed cost.
    7. All other things being equal, we have assumed that earnings contributions from other non-mobile businesses and operations outside Singapore remain unchanged.

Full impact from increased competition in 2019. 

  • We estimated that M1’s and StarHub’s 2019F net profit would decline 32.6% and 16.3% respectively, due to the entry of a fourth mobile operator. We estimated that Singtel’s FY19 net profit would only decline 1.9%.

M1 (SELL/S$2.52/Target: S$2.14)

  • Having to compete for more spectrum. iDA will allocate each incumbent mobile operator, including M1, 2x5MHz of the 900MHz frequency band at a reserve price of S$20m. However, M1 would have to bid competitively to get its fair share of the 700MHz and 2500MHz frequency bands during the upcoming auction in 2H16.
  • Growth from enterprise customers. Enterprise customers account for 10-12% of M1’s fibre broadband subscriber base but contribute half of its fibre broadband revenue. M1 is a sub-contractor to NetLink Trust. Thus, it is able to influence the timeliness of services provided to its enterprise customers. It has also made inroads into providing connectivity for government agencies.

StarHub (SELL/S$3.58/Target: S$2.30)

  • Digging in for a tough fight. StarHub has raised fresh funding of S$300m through its medium-term note programme in May 16. Management intends to utilise the proceeds for new acquisitions and investments. So far, StarHub has invested S$18m for a 9.1% stake in mm2, a producer of content for TV and films. The additional funds could be a war chest to acquire more spectrum during the upcoming auction in 2H16.
  • Continuing to cross-carry EPL. StarHub would be able to cross-carry English Premier League (EPL) when the new football season starts on 13 Aug 16.

Singtel (BUY/S$3.89/Target: S$4.38)

  • Singtel is our top BUY as its mobile business in Singapore accounts for 13% of group revenue (only 7% if we include the proportionate share of associates’ revenue).
  • Singtel has a higher beta of 0.88x vs 0.62x for M1 and 0.61x for StarHub. Accumulate the stock on weakness caused by concerns over Brexit.


SECTOR CATALYSTS

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


ASSUMPTION CHANGES

  • We maintain our existing earnings forecasts and target prices.


RISKS

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




PEER COMPARISON 


Singapore Telcos Peer Comparison by UOB Kay Hian 2016-06-28




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-06-28
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 2.14 Same 2.14
BUY Maintain BUY 4.38 Same 4.38
SELL Maintain SELL 2.30 Same 2.30


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