Telco - CIMB Research 2016-11-17: Overall Fourth mobile player confirmed!

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

Telco - Overall Fourth mobile player confirmed!

IMDA pre-qualifies MyRepublic and TPG to bid for fourth mobile licence in NESA.
With one of these two parties eventually emerging as the auction winner, the entry of a fourth mobile player into the Singapore market is now confirmed.
No change to our earnings forecasts as we had factored in a 15% impact to mobile ARPU between FY17-20.
We cut M1’s/StarHub’s target price by 17.6%/13.5% as it was previously based on the mid-point between the scenario of a fourth player emerging and status quo.

Maintain Hold on M1 and StarHub as their valuations are merely fair. SingTel remains our only Add and preferred Singapore telco pick.

Infocomm Media Development Authority (IMDA) announced today that it has prequalified MyRepublic and TPG Telecom to participate in the New Entrant Spectrum Auction (NESA), while airYotta did not make the cut.
With one of these two parties eventually emerging as the auction winner, it is now confirmed that a new fourth mobile player will enter the Singapore market.

Although there were some delays before IMDA arrived at its final decision, we believe that this development will not come as a major surprise to the market. Singapore telco share prices have declined since 1 Sep when MyRepublic, TPG and airYotta showed up to submit their application to bid in NESA.
Given their operational track record, it is also not entirely a surprise that MyRepublic and TPG made it through the pre-qualification stage.

While the IMDA did not give a timeline, we believe that NESA should take place before year-end, followed by the General Spectrum Auction (GSA) soon thereafter. It is difficult to predict who will eventually emerge as the winner in NESA, as this also depends on the value ascribed to the licence by the respective players. However, purely from a balance sheet strength perspective, TPG may be able to outbid MyRepublic.

Our earnings forecasts for Singapore telcos are unchanged, as we had earlier factored in a 15% impact on mobile ARPU between 2017-20 due to more intense competition from a fourth mobile player.
Based on this assumption, we forecast core EPS to decline by 36.4% for M1 and 24.9% for StarHub between FY17-20, while SingTel’s Singapore core EPS should still grow by 10.4% due to a) Enterprise growth and b) narrower Digital Life losses, as well as the fact that mobile forms only 28% of its total service revenue.

We cut our DCF-based target price for M1/StarHub by 17.6%/13.5% to S$2.10/S$3.20, now that the entry of a fourth mobile player is confirmed.
Our previous target prices for M1 and StarHub were based on the mid-point between the scenario of a fourth mobile player entering the market and status quo.
Our SOP-based target price for SingTel is unchanged at S$4.50, owing to the small impact from the entry of a new mobile player.

Although M1’s and StarHub’s share prices have fallen in the past 24 months, we believe that their current valuations are just about fair. We also see a big overhang on their share prices at least until the fourth player’s service launch in early-2018, when the market could get better visibility on its impact.
Maintain Hold on StarHub and M1, as we believe their 5-7% yields are merely sufficient to compensate investors for future earnings risk. SingTel is our only Add and preferred Singapore telco pick.

HOLD, TP S$2.10, S$2.04 close
We expect M1 to be the hardest hit by new competition, given its focus on Singapore and mobile, its relatively higher prepaid revenue mix and inability to bundle pay TV services in a quad-play offering.

ADD, TP S$4.50, S$3.66 close
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.

HOLD, TP S$3.20, S$3.00 close
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 a 2.3% drop in core EPS in FY16.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2016-11-17

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