Telecommunications - RHB Invest 2017-04-05: General Spectrum Auction

Telecommunications - RHB Invest 2017-04-05: General Spectrum Auction Singapore Telcos Spectrum Auction SINGTEL SINGTEL Z74.SI M1 LIMITED B2F.SI STARHUB LTD CC3.SI

Telecommunications - General Spectrum Auction

  • The IMDA pocketed a handsome SGD1.14bn from the just-concluded 4G auctions, which saw the coveted 700MHz spectrum band going for 4.7x the reserve price, while bids for the 2500MHz also exceeded expectations. 
  • As expected, the Big-3 operators wrestled for the 700MHz albeit with a disproportionate share. 
  • Based on spectrum payouts, M1 stands to be the most impacted with its TP potentially falling by 11.2%, followed by StarHub (-7.5%), while Singtel’s TP looks to be the most resilient. 
  • Maintain NEUTRAL sector weighting with Singtel as our preferred exposure.

SGD1.14bn from 4G auctions. 

  • The Infocomm Media Development Authority (IMDA) netted SGD1.14bn from the just-concluded General Spectrum Auction (GSA), which saw 175MHz of bandwidth at the 700MHz, 900MHz and 2500MHz bands assigned to four operators. 
  • The final bid price for the beachfront 700MHz spectrum came in at 4.7x the reserve price (SGD20m per block), significantly higher than our/market expectations, while the final price for the 2500MHz was 4x the reserve price at SGD3m per block, suggesting the bids were equally aggressive. 
  • In total, Singtel paid SGD563.7m for 75MHz of spectrum while StarHub, M1 and the fourth mobile entrant, TPG Telecom (TPG) forked out SGD349.6m, SGD208m, and SGD23.8m respectively for 60MHz/30MHz/10MHz. 
  • StarHub’s spectrum fee of SGD5.8m per MHz for the combined spectrum was the lowest among its peers.

Singtel won the biggest chunk of the 700MHz/900MHz. 

  • Singtel secured the maximum allowed for the 700MHz/900MHz bands, winning four blocks (2x20MHz) and two blocks respectively (2x10MHz), while StarHub and M1 netted 15MHz/10MHz of the 700MHz. The 700MHz band is deemed as prime real estate given its superior propagation (reach and in-building penetration), which also allows for significant capex savings on 4G. The usage of the spectrum is however dependent on the analogue switch off (ASO) with the earliest implementation in Jan 2018. The three operators exercised their first right of refusal (FROR) for 5MHz of the 900MHz (to be used for 3G services) at the reserve price, with Singtel coughing out a whopping SGD132m (6.6x the reserve price) for an additional 5MHz. It now has equal blocks of the 900MHz with TPG, which was allocated the same band at the new entrant spectrum auction (NESA) last December.

StarHub has the biggest swathe of the 2.5GHz. 

  • At 20MHz, StarHub has the largest block of the time division (TD) LTE spectrum, which would serve as a capacity overlay for its 4G network. It already has a 40MHz block, that was secured in 2013. 
  • We believe M1 ceded the 2500MHz as the auction turned out to be more aggressive than initially anticipated, leaving it to channel its focus on the 700MHz. We do not rule out M1 and StarHub pooling spectrum resources as part of their network collaboration study. A merger between both telcos would also consolidate and strengthen the overall spectrum portfolio. 
  • As for TPG, it now boasts a good mix of high and low band spectrums, in support of its network deployment.

M1 likely to see the largest impact on TP and net debt/EBITDA. 

  • Based on the spectrum fees to be borne by the respective telcos, M1’s net debt/EBITDA stands to be the most impacted, with FY17 net debt/EBITDA set to rise to 1.76x from 1.1x. This is followed by StarHub’s 1.5x (from 0.97x) and Singtel’s 0.94x (from 0.87x). 
  • We estimate that the impact on M1’s TP to be the greatest, potentially knocking off 11.2%, followed by StarHub’s -7.5% and Singtel’s marginal -0.9% impact. 
  • Our preferred exposure to the Singapore telco sector remains Singtel, given its relatively more diversified earnings base.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-04-05
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 4.000 Same 4.000
NEUTRAL Maintain NEUTRAL 2.050 Same 2.050
NEUTRAL Maintain NEUTRAL 2.700 Same 2.700