Telco Sector - CIMB Research 2017-05-30: Are All The Negatives Priced In?

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Singapore Telco Sector Outlook 2017 SINGTEL Z74.SI M1 LIMITED B2F.SI STARHUB LTD CC3.SI

Telco - Underweight  

Key question: Are all the negatives priced in?

After the big share price de-rating for Singapore telcos, especially StarHub and M1, are all the negatives priced in and should investors buy instead of sell these stocks? 

• Firstly, after the de-rating, StarHub's share price and M1's share prices have not overshot on the downside and are still trading above their fair values, based on DCF valuation. 
• Given the high degree of uncertainty regarding the impact from newcomer, TPG Australia, there is a fairly wide range of fair value for StarHub and M1 in our scenario analysis. However, both share prices have yet to reach our bear-case (-15% ARPU impact) fair value, which is a more comfortable entry point, in our view.
• Secondly, there could still be negative surprises in store in 2H17. Players could aggressively jostle for market positions ahead of TPG's service launch in mid- 2018. As a result, they may incur heavy handset subsidies, especially coinciding with the launch of the iPhone 8, to lock in customers for the next 2 years. They could also spend more to strengthen key areas of differentiation, in particular on customer touch points. 
• The outcome of the general spectrum auction (GSA) held at end-Mar, where spectrum payments were bid to shockingly high levels, is an indicator that the incumbents would do all they can now to enhance their competitiveness, in our view.
• We believe investors should only re-consider Singapore telcos as potential investments after the 2H17 results. Depending on the share prices at that point, investors may look out for any newsflow that suggests delays/difficulties faced by TPG in network rollout or any signs that TPG's offers are unlikely to be overly aggressive, which could be re-rating catalysts.

2H17 Outlook 

• The outlook for Singapore telcos remains dim into 2H17 due to structural issues and increased competition among existing players. 
• The mobile business will likely see continued yoy declines in revenues due to lower roaming/local voice usage. While the launch of attractive upsize data offers has not resulted in subs down-trading, they have somewhat capped any revenue upside from continued growth in data usage, which could have helped to offset lower roaming/voice revenues. In addition, telcos' earnings in 2H17 may be hit by 
  1. high subscriber acquisition and retention costs as players take advantage of the launch of popular handsets (iPhone 8, Samsung Note 8) to lock in customers ahead of TPG's service launch in mid-2018, and 
  2. cost incurred to strengthen key areas of differentiation, such as customer touchpoints.
• The pay TV business is also facing a structural decline due to rampant piracy and the availability of alternative online video platforms, such as NetFlix, Viu and Amazon Prime Video. As such, we expect telcos' pay TV subs to continue declining through 2H17, even though ARPU could hold steady. 
• For the residential broadband business, price competition remains intense from NBN-based players while the propensity of subs to upgrade to higher speed fiber packages is now less given that many have already done so in the past 2 years. Hence, we believe fixed broadband revenues are unlikely to be a potential revenue growth driver in the 2H17. 
• The only business segment that should still grow by mid-single-digit yoy is enterprise fixed services due to increased take-up of managed services and ICT solutions (e.g. cybersecurity).

POSITIVE CATALYSTS TO LOOK FOR 

• Singtel's IPO of NetLink Trust, possibly in 3Q17, could result in the return of special dividends to shareholders, to the tune of S$0.10-0.15/share.
• Shareholders of M1 are putting a combined 61.1% stake up for sale, with the tender offer exercise closing by end-Jun. Should there be any buyer, it would trigger a mandatory general offer. However, the outcome of the tender offer is very difficult to predict at this stage.

NEGATIVE CATALYSTS TO FEAR 

• Continued delivery of weak earnings across the Mobile, Pay TV and Fixed Broadband businesses.
• Telcos incur high subscriber acquisition and retention cost in 2H17 to lock in subs on 2-year contracts, ahead of TPG's service launch, possibly in mid-2018.
• StarHub and M1 should be able to meet their dividend guidance for FY17, but investors may start to worry about the sustainability of dividends for FY18 onwards, weighed down by heavy spectrum payments and grim earnings outlook.

TOP PICKS: SingTel
TOP SHORTS: M1

Singapore Research CIMB Research | http://research.itradecimb.com/ 2017-05-30

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 4.100 Same 4.100

REDUCE Maintain REDUCE 1.700 Same 1.700

REDUCE Maintain REDUCE 2.450 Same 2.450