Singapore Telecommunications - UOB Kay Hian 2016-09-05: Bharti Airtel ~ Challenged By Reliance Jio

SINGTEL Z74.SI

Singapore Telecommunications (ST SP) - Bharti Airtel – Challenged By Reliance Jio

Bharti Airtel faces formidable challenge from Reliance Jio, which has captured consumers’ mindshare in India by offering free voice calls. Bharti Airtel contributed 12.9% of group PBT in FY16.
We have trimmed our earnings forecast for Singtel by 0.4% for FY17 and 0.9% for FY18 and lowered our target price to S$4.53. Maintain BUY.

Reliance Industries and its chairman Mukesh Ambani have launched its mobile venture Reliance Jio Infocomm during their AGM last Monday. The attractiveness of Reliance Jio’s service offering was breath-taking. All voice calls are free and there will be no domestic roaming charges. Data is priced at the cheapest rate of Rs50/GB. The pricing structure is simplified to just 10 tariff plans.
Commercial services will commence on 5 Sep 16, and will be free for 90 days till the end of the year, in what Mukesh Ambani calls the “Jio Welcome Offer”. Reliance Jio has set a lofty but aggressive target of acquiring 100m subscribers as soon as possible.
Reliance Jio has an all-IP and pure 4G network that covers 18,000 cities and 200,000 villages. It aims to achieve population coverage of 90% by Mar 17. Reliance Jio is in the process of rolling out 1m WiFi hotspots by mid-17.

Reliance Jio owns spectrum in the 800MHz and 1,800MHz frequency bands in 10 and 6 circles, respectively, out of a total 22 circles in India. It also owns a pan-India license for the 2,300MHz band. Reliance Jio has entered into a spectrum sharing deal with Reliance Communications, which is backed by younger brother Anil Ambani, for the 800MHz band across seven other circles.
Reliance Jio is said to have incurred huge capex exceeding Rs1t (US$15b). Its commercial launch has also been delayed by as much as two years.

Hit by double whammy. Singtel has corrected 8.3% last week due to concerns over increased competition in Singapore and India. We believe the retracement last week has factored in negative developments in both Singapore and India.
Bharti Airtel contributed to 12.9% of Singtel’s group PBT. Its share price dropped 9.6% from last Monday to Thursday but recovered 2.6% on Friday.

We have trimmed our net profit forecast for Singtel by 0.4% for FY17, 0.9% for FY18 and 1.5% for FY19 as consensus earnings for Bharti Airtel was revised down by 2.7% for FY17, 7.1% for FY18 and 11.5% for FY19.

We have lowered our target price for Singtel to S$4.53 based on DCF (required rate of return: 5.75%, growth: 1.2%). We have assumed a worst-case scenario whereby a fourth mobile operator disrupts the status quo.

Singtel is the least affected by a fourth mobile operator in Singapore as overseas businesses accounts for about 70% of its bottom-line.
Singtel will benefit from growth at its regional mobile associates, such as Telkomsel in Indonesia, Bharti Airtel in India, Advanced Info Service in Thailand and Globe Telecom in the Philippines.
Since it is the largest and most liquid defensive stock listed on the Singapore Exchange, Singtel deserves to trade at a premium.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-09-05

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.53 Down 4.610