Telecommunications - UOB Kay Hian 2017-03-27: Assessing Threats From TPG Telecom

Telecommunications – Singapore - UOB Kay Hian 2017-03-27: Assessing Threats From TPG Telecom Singapore Telecom Sector 4th Telco TPG Telecom SINGTEL Z74.SI STARHUB LTD CC3.SI

Telecommunications – Singapore - Assessing Threats From TPG Telecom

  • While the entry of TPG Telecom as the fourth mobile operator will increase competitive intensity within the mobile space, this risk is offset by potential consolidation of the mobile industry over the next 3-5 years. Maintain OVERWEIGHT.
  • Re-iterate BUY for Singtel with a target price of S$4.53. HOLD StarHub as share price has bottomed.


Good results from TPG. 

  • TPG Telecom (Bloomberg ticker: TPM AU) reported growth in revenue, EBITDA and NPAT of +8%, +8% and +11% yoy respectively for the six months ending Jan 17 (1HFY17). All business units, namely TPG Consumer (+7.6% yoy), TPG Corporate (+3.8% yoy) and iiNet (+8.9% yoy), registered growth. 
  • It declared an interim dividend of 8 A cents per share, representing an increase of 14% yoy. Management also reaffirmed guidance of EBITDA at A$820-830m for FY17.
  • TPG’s share price has gradually recovered recently after the crash in mid-September post announcement of results for the financial year ending Jul 16.

Read-through from TPG’s results briefing. 

  • TPG has acquired two lots of 2x5MHz of 900MHz (20MHz) and eight lots of 5MHz of 2,300MHz (40MHz) at an aggregate price of S$105m during the New Entrant Spectrum Auction conducted on 14 Dec 16.

Preparation underway for Singapore. 

  • TPG has already set up its local office in Singapore. Recruitment and network planning activities are progressing well. It has hired network engineers and project managers to oversee the rollout of its mobile network in Singapore. TPG plans to start delivering mobile services in 2018. It has to complete nation-wide outdoor coverage by Sep 18, while concurrently working in parallel to complete its indoor coverage.
  • Management budgeted capex for network rollout in Singapore at S$200-300m. The bulk of capex would be incurred in 2017 and 2018. Management has guided capex for Singapore at A$120-160m (S$128-171m) for FY17, including cost of acquisition for spectrum. We estimate capex at S$45m in FY17 and S$205m in FY18.
  • Management previously estimated that TPG’s mobile business in Singapore could become EBITDA positive with market share of just 5-6%. It is able to breakeven within a short period of time due to the excellent value of its service offerings.

Approach to General Spectrum Auction. 

  • Management indicated that TPG has garnered sufficient spectrum from the New Entrant Spectrum Auction. TPG may consider participating in the General Spectrum Auction as there are advantages in acquiring more spectrum. However, capex required for the next auction is not included within its capex guidance.


Out of the woods. 

  • Competition will intensify with TPG Telecom entering the mobile market as the 4th mobile operator in 2018. The dire outlook has forced StarHub into exploring network sharing as a means to reduce capex and opex. 
  • The industry is unlikely to consolidate in the near term. Nevertheless, we see prospects of a return to a 3-player oligopoly as favourable over the next 3-5 years.

Singtel (BUY/S$3.88/Target: S$4.53)

Special dividends from divestment of NetLink Trust. 

  • Singtel has appointed Morgan Stanley, UBS and DBS as advisors for the IPO of Netlink Trust
  • Singtel is required to reduce its stake in NetLink Trust to below 25% by Apr 18. Management intends to return a portion of the IPO proceeds back to shareholders. Singtel would be able to return up to 17.5 S cents/share back to shareholders in the form of a special dividend assuming that NetLink Trust was valued at S$3.8b.

Impact from 4th mobile operator. 

  • The overall impact on Singtel is likely to be marginal as the mobile business in Singapore accounted for only 7% of revenue if we include proportionate share of revenue from its regional mobile associates.

StarHub (HOLD/S$2.88/Target: S$3.10)

Management revamp. 

  • StarHub has appointed Chong Yoke Sin, previously CEO of Integrated Health Information Systems, as Chief of Fixed Enterprise with effect from 3 Apr 17. Mock Pak Lum, currently the CTO, was designated as Chief Business Development Officer. Chong Siew Loong, currently vice president of network engineering and CTO, will become head of network engineering. 
  • The revamp could sharpen StarHub’s focus on the Fixed Enterprise business.

Impact from 4th mobile operator. 

  • StarHub is vulnerable to competition from the 4th mobile operator as mobile accounted for 55% of its service revenue in 4Q16.


  • StarHub’s share price is likely to have bottomed.
  • Investors buying into Singtel as a defensive shelter and for resilient yield.


  • We maintain our existing earnings forecasts.


  • Execution risks that StarHub may not be able to close the deal or achieve the desired cost savings from network sharing.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-27
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.530 Same 4.530
HOLD Maintain HOLD 3.100 Same 3.100