Singapore Telecom Sector - OCBC Investment 2017-09-11: Intensifying Competitive Landscape

Singapore Telco Stocks Singtel vs M1 vs Starhub SINGTEL Z74.SI M1 LIMITED B2F.SI STARHUB LTD CC3.SI

Telecom Sector - Intensifying Competitive Landscape

Challenging outlook for mobile segment.
MyRepublic wants to be the next MVNO.
Singtel our preferred telco.

Sector Recap

2QCY17 financial performance recap

All three telecommunications service providers (telcos) reported weaker performances as mobile segment continues to be impacted by intense competition (i.e. pressures on ARPU), coupled with the increasing adoption of over-the-top (OTT) services that led to lower usage revenue from traditional voice services, IDD and roaming services.
Despite the drop in bottom-line, all three telcos reported in-line results for 2QCY17.
- Singtel’s weaker Singapore performance and lower associates’ contributions, due to intense competition in India, were offset by stronger Australia consumer performance and lower losses from Digital Life segment.
- Starhub’s 2Q17 revenue growth from enterprise fixed and sales of equipment were more than eroded by weakness from mobile and Pay TV segments.
- For M1, while 2Q17 revenue grew on the back of higher fixed services revenue and higher handset sales, operating costs increased at a faster pace resulting in YoY decline in earnings.

Uninspiring outlook

For Singtel (FYE 31 Mar), it lowered its FY18 guidance for group’s revenue to grow by low single-digit level compared to previous guidance of mid-single digit level. Guidance for EBITDA to grow by low single-digit level remained unchanged. Mobile service revenue from Australia is expected to grow by low single-digit, but Singapore’s mobile revenue is expected to decline by low single-digit. Singtel’s capex guidance remained unchanged: S$2.6b on an accrual basis and S$2.4b on a cash basis. Guidance on ordinary dividends from regional mobile associates remained at S$1.4b for FY18.
Starhub guided for FY17 service revenue to be flat and service EBITDA margin to be between 26% and 28%. Dividend guidance is maintained at S$0.04/quarter for FY17.
Noting challenging and uncertain market conditions, M1 guided for a decline in FY17 NPAT but maintained its dividend payout ratio guidance of 80% for FY17. It also guided for capex to be S$150m for FY17, which excludes any spectrum payments.

Underperforming the broader market

Since the start of CY17, the Singapore telecom sector has been tracking the STI index’s performance closely until Mar 17, where performances of both STI Index and FTSE Straits Times Telecommunications Index (FSTTC) started to diverge.
As highlighted previously, we believe the underperformance is the result of the impending entry of TPG, aggressive marketing by mobile virtual network operator (MVNO), Circles.Life, as well as MyRepublic’s announcement of its intention to launch mobile services as the second MVNO in Singapore by Oct 17.
As at 8 Sep 17, the forward P/E of FSTTC index is trading close to -1SD below its 5-year mean, which reflects the ongoing challenges the Singapore telcos are facing.

Mobile Segment

ARPU remains weak as roaming revenue continues its decline

For 1HCY17, the three telcos cumulatively added 82k in net new postpaid subscribers, and proportion of 4G users has risen to around 84% of the total 3G and 4G subscriber base as at 30 Jun 17.
Average revenue per user (ARPU) continues to be under pressure with the three telcos citing lower voice, IDD and roaming usage (both inbound and outbound) as the key reasons. We expect this trend to continue with the increasing adoption of over-the-top services (OTT), as subscribers switch to using data for calls instead of using the traditional call services.

Mobile landscape continues to be challenging

As we have previously highlighted, competition within the Singapore mobile segment is set to intensify with the impending entry of TPG, coupled with the aggressive market campaign by mobile virtual network operator (MVNO), Circles.Life, offering data-focused plan at significantly lower prices than the incumbents.

MyRepublic intends to launch mobile services as MVNO

In addition, local fibre broadband operator MyRepublic announced back in Jul 17 its plan to launch mobile services in Singapore likely in Oct 17.
Recall that MyRepublic was one of the bidders for Singapore’s fourth telco license but lost out to TPG. MyRepublic will be operating as a MVNO, and said that it already has an agreement to buy mobile bandwidth wholesale from one of the existing telcos, which will be announced soon.
It was also reported that their strategy will be to offer generous mobile data, and leverage on its existing fibre broadband customer base to secure new mobile customers, and looking at no more than 5-6% market share. In our view, the impending entry of MyRepublic will further intensify the competition within the industry even before TPG’s launch their services.
We believe as the market gets more crowded with players offering similar services, pricing power will fall, and given limited growth in subscribers, ARPU will continue to face pressures, especially for a saturated mobile market in Singapore.

Aggressive plans to protect market share

Late last month, both Starhub and M1 also launched aggressive campaigns targeted at data-hungry customers by offering plans with unlimited data allowances.
- M1 launched Singapore’s first unlimited 4G mobile plan but only for the highest tiered plan that cost S$98/month, while
- Starhub launched new mobile plans with unlimited data usage only on weekends.
- Singtel has yet to respond with any unlimited data offering plans at this point in time.
In our view, we believe these launches by the two telcos could be in anticipation of MyRepublic’s intention to launch mobile services next month with generous mobile data as the key strategy to gain market share. It remains to be seen if such plan will gain traction and lock in customers over a 12 to 24-month contract period.

Data monetization essential for long-term growth

Over the longer-term, we expect the ability of telcos to effectively monetize data usage will be one of the key areas to grow their mobile business. The telcos started with data upsize offerings as part of the efforts to first encourage users to increase their data usage and at least for Starhub and M1, they have moved on to offer unlimited data plans to consumers.
Average monthly smartphone post-paid data usage has been increasing across all three telcos:
- M1 saw an increase from 3.6GB in 4Q16 to 3.9GB in 2Q17,
- Starhub recorded an increase from 3.7GB in 4Q16 to 4.0GB in 2Q17, and lastly,
- Singtel posted an increase from 3.2GB in 4Q16 (or 3QFY17) to 3.5GB in 2Q17 (or 1QFY18).
With data usage on an upward trend, Circles.Life’s marketing campaign has also been revolving around cheap data offering.
Coupled with MyRepublic intention to launch mobile services offering plans with generous data allowances, we expect pressures on overall ARPU to intensify.

Decline in post-paid ARPU unlikely to bottom-out soon

Hence, on aforementioned reasons, we further cut our ARPU assumptions for the incumbents.
For the period CY16 to CY21, we forecast for post-paid mobile ARPUs of Singtel, Starhub and M1 to register CAGR of -2.4%, -3.4% and -4.3%, respectively.

Highly saturated market with many players

With Singapore’s mobile penetration rate already at ~151%, growth in number of subscribers going forward will be limited and slow, if any.
Coupled with falling ARPU amid intensifying competitive environment, we forecast for total mobile revenue to fall ~13.6% between CY16 and CY21 (FY22 for Singtel). We also forecast for TPG to achieve ~6% mobile revenue share by CY21.

High final pricing for spectrum at GSA

The General Spectrum Auction (GSA) concluded early-Apr 17 with spectrum awarded at a total cost of ~S$1.14b – Singtel (S$536.7m), Starhub (S$349.6m), M1 (S$208.0m) and TPG (S$23.8m).
The assignment stage of the GSA for the 900MHz band and 2.5GHz band took place between 12 Apr 17 and 19 May 17, while the assignment stage for the 700MHz band will only be conducted by IMDA nearer to the commencement date of the spectrum rights (to be determined).
In our view, while increasing spectrum capacity is necessary for telcos to expand their mobile businesses and be ready to support 5G network in the future, the high costs of these spectrum rights do not help in times of intensifying competitive pressure.

Broadband Segment

High penetration makes competition tougher Residential broadband market continues to be relatively stable as Singtel and M1 added a total of 12k in new customers between 1QCY17 and 2QCY17 but Starhub’s broadband subscriber base fell by 3k during the same period.
As at end-2QCY17, total broadband subscriber base of the three telcos was 1.26m subscribers, which represent ~93.9% (end-4QCY16: 92.7%) of the overall Singapore broadband market. Across all the telcos, ARPU has been relatively stable for 1HCY17. However, for M1, we believe the 5.7% QoQ drop in 4QCY16 ARPU was the key reason for the 15.8% increase in subscriber base between end-3QCY16 and end-2QCY17.
Looking ahead, our view remains unchanged – we expect competition within Singapore’s broadband industry to intensify with the expected entry of TPG.
With the ability to leverage on Singapore’s Next Generation Nationwide Broadband Network (NGNBN), it makes sense for TPG to launch fibre broadband services even before the launch of mobile services. The reason being by establishing a presence in the broadband market before mobile services launch, we believe TPG will be able to offer bundling option (mobile + broadband) at a discount, which is similar to M1’s strategy (i.e. without Pay TV offering).
Note that TPG is already an established fixed service provider and no-frills MVNO in Australia, and we believe this will help keep its cost structure lean to compete effectively across both markets.

Pay TV Segment

Stable ARPU amid declining subscriber base

Singapore’s Pay TV market continued its decline as the total number of Pay TV subscribers as at end-2QCY17 fell 1.6% QoQ to 881k.
Starhub fell by a greater 2.1% QoQ to 404k subscribers while Singtel’s subscriber base declined at a slower pace of 1.0% to 404k. ARPU remained largely stable as both Singtel and Starhub cited focus continues to be on retaining higher-value customers.
In our view, the Pay TV segment decline is not surprising given the increasing adoption by consumers in using OTT content service providers (e.g. Netflix, VIU etc.).
While both Singtel and Starhub continue to make efforts to manage the contents offered on their Pay TV platforms, we are expecting the downwards trend to persist ahead with more subscribers switching to OTT service providers. Even if the two telcos manage to keep ARPU stable, revenue will likely be on a downward trend as the subscriber base shrinks over time.

Recommendations

Dividend yield support remains important

Based on 1H17 results, ~55% of Starhub service revenue and ~88% of M1 revenue is derived from Singapore’s mobile segment, respectively. In our view, given both telcos’ significant exposures to Singapore mobile market, we expect their earnings to come under pressure, which may translate to lower dividend ahead. Recall Starhub has already cut its dividend from S$0.05/quarter in past years to S$0.04/quarter in FY17, while M1 continues to maintain its guidance of 80% payout ratio.
Given declining earnings outlook, we expect M1 dividend yields to fall over the next few years. We believe this has been largely priced-in for M1 but see further downside to Starhub’s current share price. FSTTC index forward dividend yield is trading at close to 1SD above the 5-year average, which we believe reflects the ongoing challenges in the industry.
All considered, for Singtel, we continue to like its diversified portfolio given that its effective exposure to Singapore’s mobile segment is only limited to 4% of its 1QFY18 total group revenue. Even for Australia, we estimate Singtel’s effective exposure to Australia’s mobile segment is ~16% of its 1QFY18 total group revenue. Hence, we believe TPG’s entry in Singapore and Australia as the 4th telco will not have significant impact on the group earnings in the near-term.
Over the medium to longer-term, we expect the weaker mobile earnings to be offset by the potential high growth coming from its enterprise and digital life segment on the back of increasing demand for cyber security, data analytics and digital marketing services.
Coupled with the S$2.3b cash received from the IPO of NetLinkTrust, we expect near-term dividends to remain stable, but expect it to grow over the longer-term on aforementioned reasons.

Maintain NEUTRAL on Singapore Telecom Sector

While the sector is getting crowded with impending entry of TPG as the 4th telco and MyRepublic as the second MVNO, we are maintaining our NEUTRAL rating on the sector.
With the intensifying competitive landscape for the telecom sector, we further cut our ARPU assumptions for all three telcos, and maintain our forecast for TPG’s market share to reach 6% by CY21.

Reiterate BUY on Singtel

Within the sector, we continue to reiterate Singtel [BUY; FV: S$4.19] as our top pick.
We are positive on Singtel’s longer-term outlook given its growing presence in the digital space – cyber security, data analytics and digital marketing, all of which we believe are industries with high growth potential as Singapore transform towards a digital economy.
See report: Singtel - OCBC Investment Research 2017-09-11: Beneficiary Of The New Digital Economy

Maintain SELL on Starhub

For Starhub, we expect earnings ahead to be dragged by weak mobile and Pay TV segments, and also prefer to wait for clearer indications of its enterprise business gaining consistent and stronger traction. Hence, for now, maintain SELL on Starhub with a 12-month fair value estimate of S$2.30.
In the near-term, we believe its share price will be supported by its commitment to dividend of S$0.04/quarter or forward dividend yield 6.1%.
See report: StarHub - OCBC Investment Research 2017-09-11: Ready To Ramp Up Enterprise Business

Upgrade M1 to HOLD

Given the steep decline its share price, we are upgrading M1 from SELL to HOLD with a 12-month fair value estimate of S$1.65 on weaker mobile earnings outlook. We believe its share price in the near term will be supported by its forward dividend yield of 6.9%.
That said, with declining earnings outlook, we expect its dividend (assuming 80% payout) to also fall over the next few years.
See report: M1 - OCBC Investment Research 2017-09-11: Tough Times Ahead

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2017-09-11

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 4.190 Down 4.25

HOLD Upgrade SELL 1.650 Down 1.75

SELL Maintain SELL 2.300 Down 2.40

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