Telecommunications – Singapore - UOB Kay Hian 2017-09-25: TPG Telecom – Overstretched And Forced To Prioritise

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Singapore 4th Telco TPG Telecom SINGTEL Z74.SI M1 LIMITED B2F.SI NETLINK NBN TRUST CJLU.SISTARHUB LTD C33.SI

Telecommunications – Singapore - TPG Telecom – Overstretched And Forced To Prioritise

• The entry of TPG Telecom as the fourth mobile operator in Singapore will be delayed to 2H18. Its financial performance is also likely to worsen in FY19. 
• Given the acute execution risk in Australia, TPG has limited capacity to pursue an overly aggressive and disruptive strategy to gain market share in Singapore. 
• BUY M1 (Target: S$1.98) and Singapore Telecommunications (Target: S$4.53). 
• Yield-oriented investors should also consider NetLink NBN Trust (Target: S$0.93). 
• Maintain OVERWEIGHT.

WHAT’S NEW

Growth has slowed at TPG. 

• TPG Telecom (TPM AU) reported underlying EBITDA of A$835m for FY17, above its revised guidance of A$820m-830m. EBITDA grew 8% yoy in FY17 but declined 11.8% hoh in 2HFY17. 
• Earnings growth has also decelerated from 60.6% yoy in FY16 to just 5.7% yoy in FY17.

TPG cut its final dividend from 7.5 cents to 2.0 cents. 

• The board believes it is in the best interest of shareholders that a greater proportion of profits is retained and deployed in the rolling out of its mobile networks in Australia and Singapore.

EBITDA to drop in FY18. 

• Management guided underlying EBITDA of A$800m-815m for FY18, or a 2-4% yoy drop. The drop will be due to the migration from ADSL to NBN Co (negative impact: A$60m) and the decline in gross profit for iiNet’s fixed voice business (negative impact: A$20m). Management expects 400,000-500,000 ADSL subscribers to migrate to NBN Co in FY18.
• TPG’s financial performance is likely to worsen in FY19 due to:
  1. start-up losses from mobile operations in Australia and Singapore,
  2. commencement of amortisation of spectrum licenses and depreciation of network infrastructure, and
  3. imposition of levy of A$7.10/month for ADSL connections above 25Mbps starting Jul 18.

Consumers would have to wait. 

• Based on its existing accounting policy, TPG amortises its spectrum licences on a straight line basis over the licence period starting from the date the network is ready for its intended use. 
• Management has affirmed that there would be no amortisation for spectrum licences acquired in Australia and Singapore in FY18. This implies that TPG would only commence operations on a commercial basis in Australia and Singapore earliest in Aug 18.

Simultaneous rollout for mobile in Australia and Singapore. 

• For Australia, TPG plans to provide coverage and capacity to densely populated metropolitan areas with small cells and macro network using its 700MHz and 2600MHz spectrums. Implementation of initial site clusters in Sydney, Melbourne and Canberra are expected to complete by mid-18 and trial services to commence in 2H18. 
• For Singapore, key vendor contracts have been awarded and work is underway for radio network, data centres and core & backhaul networks. TPG is said to be on track for nationwide outdoor service coverage by Dec 18.
• Management has reaffirmed guidance on capex for Australia at A$600m over 2-3 years and for Singapore at S$200m-300m over two years.

Extension of debt facilities. 

• TPG has increased its total debt facilities by A$750m (+46%) to A$2,385m to finance the planned rollout of mobile networks. The maturities of its debt facilities have been extended to 3-7 years from Sep 17 and its weighted average tenure is now 4.5 years. 
• The earliest debt maturity is Sep 20.

ACTION 

Read-through from TPG’s FY17 results and briefing: 

1. The entry of TPG Telecom as the fourth mobile operator in Singapore will be delayed to 2H18.
2. TPG’s financial performance is likely to worsen in FY19 due to:
   1. start-up losses from mobile operations in Australia and Singapore,
   2. commencement of amortisation of spectrum licenses and depreciation of network infrastructure, and
   3. imposition of levy of A$7.10/month for ADSL connections above 25Mbps starting Jul 18.
3. Execution risk is more acute for the rollout of mobile network in Australia. Thus, TPG has limited capacity to pursue an overly aggressive and disruptive strategy to gain market share in Singapore.

Share prices clobbered. 

• The telecommunications industry in Singapore could consolidate from four to three players over the next 3-5 years. 
• Unfortunately, in the near term, incumbent telcos have to contend with higher handset subsidies caused by the launch of iPhone X in Sep 17 as well as heightened competition with the impending entry of TPG in 2H18. However, these near-term headwinds appear to have been priced in.

Maintain OVERWEIGHT. 

• BUY M1 (Target: S$1.98) and BUY Singtel (Target: S$4.53). 
• Yield-oriented investors should also consider NetLink NBN Trust (Target: S$0.93).

SECTOR CATALYSTS 

• M1 and StarHub collaborating on network sharing.
• Impending entry of TPG Telecom as the fourth mobile operator in 2018.

ASSUMPTION CHANGES 

• We maintain our earnings forecasts.

RISKS 

• M1 and 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/ 2017-09-25

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.530 Same 4.530

BUY Maintain BUY 1.980 Same 1.980

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