Navigating Singapore ~ Telco - CIMB Research 2016-12-05: Neutral

Singapore Sector Outlook Telco Sector

Navigating Singapore ~ Telco - Neutral

We expect industry mobile revenue to remain weak going into 2017, possibly declining by the low single-digits due to
1. the continued decline in Voice roaming and IDD usage,
2. the increased take-up of sim-only plans with lower monthly commitment fees, and
3. higher subscription to telcos’ upsize data offerings, which would cap data up-selling opportunities, if not result in subs downtrading to lower-tier packages.

We also believe the Pay TV business in Singapore will continue to be under pressure from over-the-top (OTT) video platforms such as NetFlix, Viu, etc. In the last three quarters, StarHub has seen its Pay TV subs base decline gradually for this reason, as subs come out of contract.
For the broadband business, we expect revenue to grow by the low single-digits in 2017, driven by continued upgrades by subs to higher-speed fiber packages. However, this growth should start to taper off towards end- 2017 as migration of subs from ADSL/cable to fiber would be largely completed and market competition remains intense.

The fourth mobile player’s license will become effective on 1 Apr 2017. However, as the regulator has not imposed mandatory domestic roaming and national site sharing on incumbents, the new player will require time to roll out its own network before launching its service, likely in early-2018.
Although telcos have already made some revisions to their offerings in 2016 (e.g. data upsize and sim-only), we believe incumbents may further spend heavily on subscriber acquisition and retention costs (SARC) in 2017 to lock-in subs for an additional two years before the new player enters the market.
In terms of timeline, we could possibly see the impact of this in 2H17, especially coinciding with the launch of the iPhone 8 in Sep (which is expected to see a major redesign).

While the IMDA did not give a timeline, we believe that the New Entrant Spectrum Auction (NESA) should take place before end-2016. 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. Should TPG emerge the winner, we believe it could result in more market worries for the incumbents as TPG is seen to be more disruptive, with a longer staying power to withstand aggressive competition given its stronger balance sheet.

Subsequent to NESA, the IMDA will hold the General Spectrum Auction (GSA) in 1Q17. In its annual report, TPG said that if it wins the fourth mobile operator license in the NESA, it will join the GSA to bid for an additional 15MHz of spectrum (which will give it a total 75MHz if successful, the maximum allowed).
The IDA has set various spectrum caps to prevent hoarding and frivolous bidding in the GSA. Based on these, TPG or MyRepublic may only bid for either i) 2 x 5MHz of 700MHz plus 5MHz of 2.5GHz, or ii) 15MHz of 2.5GHz.
While intense bidding cannot be ruled out, we believe this risk is manageable as there is a rather sizeable 2 x 45MHz of 700MHz spectrum available, while the 2.5GHz spectrum (also 45MHz bandwidth available) may not be that hotly sought after given its shorter propagation properties.

SingTel is likely to spin off NetLink Trust (NLT) in an IPO by 2Q/3Q17, in line with its undertaking to IDA to divest its stake to less than 25% by 22 Apr 2018.
According to International Financing Review (IFR)’s news article on 17 Nov, Singtel has already hired three bankers to manage this IPO. An 80% stake sale could raise S$2.0bn-2.8bn (12.6-17.6 Scts/share) cash, based on our estimated valuation of S$2.5bn-3.5bn for NLT. On the back of this, we think it is likely for SingTel to declare a special dividend, possibly in its 4QFY18’s results announcement (i.e. around mid-May 2018).

We believe the key downside risks for the sector are
1. how aggressive the incumbents react ahead of the service launch by the fourth mobile operator. If incumbents bring down prices significantly or offer very high handset subsidies to lock-in subs, it could have a negative impact on earnings in FY17-18,
2. intense bidding in the GSA that substantially raises the price of spectrum, and
3. the new entrant strikes a domestic roaming agreement with one of the incumbents and launches its service earlier than expected, coupled with aggressive price plans.
In terms of key upside risks, the fourth mobile operator runs into network rollout issues and service launch is delayed beyond early- 2018, or upon service launch, is not as aggressive as feared.

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 is able to get better visibility on its impact.
We 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 as
1. its medium-term earnings growth outlook is better than its peers, and
2. it will be the least impacted by the potential entry of a fourth mobile player.
Although its FY18 EV/OpFCF of 17.2x is at a 26% premium to the ASEAN telco average, SingTel offers superior yields of 4.5-5.5%.
Key downside risks are weaker-than-expected A$ and Rp, and more intense competition.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2016-12-05