Singapore Telecom Sector - DBS Research 2016-08-22: Risk is not off yet

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M1 LIMITED B2F.SI  STARHUB LTD CC3.SI 

Telecom Sector - Risk is not off yet

• StarHub launched an aggressive mobile-fixed broadband plan on 18 Aug. 
• This may be a signal that the risk of a new entrant is not off despite a weak business case for the new entrant. 
• After recent rally in StarHub and M1, consolidation in their share prices can’t be ruled out. 
• Downgrade StarHub and M1 to HOLD. 

StarHub has launched aggressive mobile-fixed broadband plan. 

• On 18 August, StarHub launched four mobile-fixed broadband plans with data bundles starting at 12GB. 
• We estimate that average revenue per user (ARPU) from these plans would be 10% lower than StarHub’s average ARPU although the adoption will be gradual. These plans seek to defend its data-hungry user segment, which is also the segment that MyRepublic intends to target.

This may signal that the risk of new entrant is not off yet.

• The reserve price of the spectrum is only S$35m but the interested players need to show adequate funding for network rollout to be eligible to bid (~S$250m in the case of MyRepublic). 
• Our checks indicate that MyRepublic is still keen to bid for the spectrum. 
• Despite a weak business case for the new entrant, one cannot rule out cash-rich investors willing to establish a footprint in Singapore. The deadline for application submission for spectrum auction is 1 September 2016 while spectrum auction is likely to be held in October 2016.

Three key factors discourage the success of a new player. 

• The lack of a domestic roaming agreement in Singapore as we have not come across any case globally of a successful new entrant without roaming in place. 
• Singapore telcos have shown their intent to defend their subscriber bases even at the cost of future profitability. 
• Potential launch of 5G in 4-5 years will lead to another round of capex, making balance sheet strength even more critical.

Downgrade StarHub and M1 to HOLD. 

• StarHub and M1 have returned 16%-18% to their shareholders over the last four months. 
• We believe investors will be better off 
  1. buying local telco stocks if new player is ruled out in October, or 
  2. accumulating them on weakness if a new player enters as the estimated adverse impact on StarHub’s and M1’s earnings will be 8% and 20%, respectively, in the long term.

Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2016-08-22

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