Telecommunications Singapore - UOB Kay Hian 2016-09-02: The Nightmare Has Just Begun

Telecommunications – Singapore - UOB Kay Hian 2016-09-02: The Nightmare Has Just Begun SINGTEL Z74.SI M1 LIMITED B2F.SI  STARHUB LTD CC3.SI 

Telecommunications – Singapore - The Nightmare Has Just Begun

  • Singapore’s mundane telco sector has attracted three potential bidders to be its fourth mobile operator, namely MyRepublic, airYotta and TPG Telecom
  • airYotta has transformed itself to discard links to discredited ConsisTel. 
  • Australia-based TPG Telecom was a surprise foreign entrant. We expect many doubters to be caught by surprise. 
  • SELL M1 and StarHub. BUY Singtel on weakness on improved dividend yield as it is least affected by the increased competition in Singapore. 
  • Maintain UNDERWEIGHT.



WHAT’S NEW


Not two, but three. 

  • MyRepublic, airYotta (local companies) and Australia-based TPG Telecom have submitted their expression of interest to Infocomm Development Authority (IDA) by deadline of 1 Sep 16.

MyRepublic – The front-runner. 

  • According to MyRepublic CEO Malcolm Rodrigues, MyRepublic wants to be a new breed of Telco that runs on new economics and built from the ground up for next generation mobile services. MyRepublic will roll out a pre-5G network that delivers higher speed and lower latency. According to MyRepublic COO Yap Yong Teck, MyRepublic sees convergence in fixed and mobile technologies and wants to play a greater role in shaping Internet of things (IoT) and Smart Nation.
  • MyRepublic’s three strategic partners and investors, Sunshine Network (affiliated to Sinar Mas and Indonesia-based mobile operator SmartFren), DST Communications (mobile operator in Brunei) and Xavier Niel (founder of 4th telco in France, Free Mobile) have reinvested. Singapore-based Leonie Hill Capital, a private equity company with offices in Singapore, South Korea and the US, also invested.

airYotta – Fresh start on a clean slate. 

  • airYotta (yotta denotes 1024, which is one billion billion or one quadrillion) is helmed by ex-management team at OMGtel. We understand that OMGtel has been acquired by a white knight, potentially a large listed local company, and could have been renamed airYotta. airYotta could be unrelated to the discredited ConsisTel, who was fined S$300,000 for a grave misconduct by IDA, as a corporate shareholder post buyout by the white knight.
  • airYotta has a capable and experienced management team. CEO Michael DeNoma was previously the CEO of Global Consumer Bank at Standard Chartered (1999-09). He has experience in telecommunications as he was previously the COO at Hutchison Whampao (1991-93). Chief Technology Officer Philip Heah was previously Senior Director of Next Gen Nationwide Broadband Network (NGNBN) at IDA (2006-14).

TPG Telecom – Foreign telco in the ring. 

  • TPG (Bloomberg ticker: TPM AU) is a fixedline operator offering ADSL, NBN, fibre optic and Ethernet broadband connections, telephony services, Internet Protocol Television (IPTV), SIM-only mobile plans (MVNO hosted by Vodafone Hutchison Australia) and business networking solutions in Australia.
  • TPG reported revenue of A$1,153m, EBITDA of A$437m and net profit of A$203m for 1HFY16. It is well managed with ROA of 12.1% and ROE of 25%. It is owned by David Teoh and Vicky Teoh (35.7%) and Washington H Soul Pattinson & Co (26.1%). It is listed on the Australian Stock Exchange with market cap of A$10.6b.
  • TPG has been on an acquisition spree, acquiring AAPT ($450m) in Feb 14 and iiNet ($1.6b) in Aug 15. AAPT delivers extreme performance networking with 11,000km of fibre and 410 exchanges in Australia. iiNet is the second largest internet service provider offering ADSL and NBN broadband connections in Australia. TPG’s share price has been on a meteoric rise, gaining 27.3% ytd and 4% over the past two days.

Undergoing pre-qualification by IDA. 

  • IDA has stipulated the qualifying criteria to ensure that only serious and capable players participate and bid for spectrum during the upcoming auction. Potential new entrants are required to submit: 
    1. capital structure and a financial proposal to acquire spectrum and operate a mobile network, 
    2. ownership structure, and 
    3. proposed mobile network and services.
  • IDA would announce its decision on whether MyRepublic, airYotta and TPG Telecom are pre-qualified by late-September, paving the way for the New Entrant Spectrum Auction to be conducted in early-October. The 60MHz of spectrum would be assigned at a reserve price of S$35m without an auction if only one company is pre-qualified. We should see a hotly contested spectrum auction if two or three companies are pre-qualified.


ACTION


Reality check. 

  • Many investors believe that MyRepublic and OMGtel are facing a lot of difficulties canvassing for funds. Some investors have also started to punt on the possibility of status quo with no new entrant by buying M1 and StarHub. The submission of expression of interest by MyRepublic, airYotta and TPG Telecom would have caught many doubters by surprise.

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. Competition could intensify during the general spectrum auction (stage B) that will be conducted in Oct 16.

Maintain our negative stance. 

  • We maintain our BUY recommendation on Singtel (BUY/S$3.97/Target: S$4.61) and SELL recommendations for M1 (SELL/S$2.66/Target: S$2.00) and StarHub (SELL/S$3.63/Target: S$2.62)


SECTOR CATALYSTS

  • Investors buying into Singtel as a defensive shelter.
  • IDA pre-qualifying MyRepublic, airYotta and TPG Telecom by end-September.


ASSUMPTION CHANGES


Never say never. 

  • We have moved our target prices based on our worst-case scenarios with the entry of a 4th mobile operator disrupting the status quo. Our new target prices for Singtel, StarHub and M1 are S$4.61, S$2.62 and S$2.00 respectively.


RISKS

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




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-09-02
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 2.00 Down 2.39
BUY Maintain BUY 4.61 Down 4.70
SELL Maintain SELL 2.62 Down 3.07


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