Telco - CIMB Research 2016-09-01: Raising the odds on a fourth mobile player

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

Telco - Overall - Raising the odds on a fourth mobile player

MyRepublic, airYotta and TPG Telecom submit applications for 4th-mobile license.
Singapore telco share prices likely to react negatively to this news as recent market talk was that potential bidders may fail to raise sufficient funding.
Potential 14%/14% target price cuts for M1/StarHub, if 4th mobile player emerges.

Meeting the 1 Sep deadline, MyRepublic, airYotta and TPG Telecom have today submitted their applications to the Infocomm Development Authority (IDA) to bid for the fourth mobile operator license in the New Entrant Spectrum Auction (NESA), scheduled for early-Oct. OMGTel, which was fined S$300k by IDA two weeks ago for breaching its licensing obligations for the Sports Hub, did not submit an application.
airYotta’s and TPG Telecom’s submissions are a surprise. airYotta is led by the former OMGTel CEO, Michael DeNoma, and Vice President for Networks and Infrastructure, Philip Heah. TPG Telecom, listed on the ASX with a market cap of A$10.6bn, is a low-cost provider of broadband, telephony, IPTV and mobile services to retail and enterprise customers in Australia, in addition to its wholesale business.

The IDA will need to review the applications and decide which companies qualify to bid in NESA, based on their business plans, planned service offerings, technical capabilities and financial position. The IDA did not specify when it will announce its decision but this should be before end-Sep, given the timeline for NESA.
For NESA, the IDA has set aside 2 x 10Mhz at the 900MHz and 40Mhz at the 2300Mhz bands to a single new entrant for a reserve price of S$35m. This is a 45% discount to the reserve price in the general auction. Rollout obligations are nationwide outdoor coverage within 18 months, 30 months for road tunnels and in-building, and 54 months for underground MRT stations/line services coverage, from 1 Apr 2017.

Recent market talk was that potential bidders for the fourth mobile license may fail to raise sufficient funding. This have partly driven up M1's, StarHub's and SingTel's share prices by 11.4%, 4.2% and 5.3%, respectively, over the past three months.
As such, we believe Singapore telco share prices could react negatively to this news.
While the final outcome is still subject to the IDA's approval, this is certainly another step closer to a fourth mobile operator entering the Singapore market.
While the spectrum price could be chased up by potentially three bidders in the NESA and put additional financial burden on the eventual winner, we think the market will likely worry more about the emergence of TPG Telecom at this stage.

M1 stands to lose the most from new competition given its purely Singapore and largely mobile focus, followed by StarHub (mobile forms c.71% of its FY16F EBITDA).
SingTel will be the least impacted as we estimate its Singapore mobile business will only account for c.11% of group FY03/17 EBITDA.
No change to our earnings forecasts, target prices and stock ratings, pending the IDA’s final decision. Our current DCF-based target prices for M1 and StarHub are based on the mid-point between the scenario of a fourth mobile player entering the market and status quo. If the former scenario materialises, we may need to lower our target price by 14.3%/13.5% to S$2.40/S$3.20 for M1/StarHub.
SingTel remains our top Singapore telco pick. Our current SOP-based target price of S$4.50 already factors in the entry of a fourth mobile player (status quo: S$4.60).

We expect M1 to be the hardest hit by new competition, given its purely Singapore and largely mobile focus, its relatively higher prepaid revenue mix, and inability to bundle pay TV services in a quad-play offering.

SingTel is the least at risk among its local peers of being negatively affected by the entry of a fourth mobile operator in Singapore due to its diversified operations. We forecast core net profit to be flat in FY17, then grow by a decent 8.4%/10.1% in FY18/19.

StarHub should be less at risk than M1 from new competition, as the mobile business accounts for a relatively smaller 71% of its EBITDA and given its ability to bundle quadplay services. Nevertheless, we expect flat EBITDA and 2.3% drop in core EPS in FY16.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2016-09-01

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