Singapore Telecommunications Sector - RHB Invest 2018-01-10: Brace For Impact

Singapore Telecommunications Sector (M1 vs SingTel vs StarHub) - RHB Invest 2018-01-10: Brace For Impact Singapore Telcos M1 vs SingTel vs StarHub M1 LIMITED B2F.SI SINGTEL Z74.SI STARHUB LTD CC3.SI

Singapore Telecommunications Sector - Brace For Impact

  • The tight competition within the sector should persist in 2018, with new entrants joining the fray. This should cast further downside pressure on the telcos’ ARPU and margins. 
  • Maintain NEUTRAL on the sector as the FTSE Straits Times Telecommunication Index (FSTTC) has underperformed the broader market by 16-25% over the past 12-18 months. 
  • Sector valuation at 10.1x FY19F EV/EBITDA is slightly ahead of its 5-year mean, albeit supported by a prospective yield of over 5%. 
  • Our Preferred Exposure remains Singtel given its more diversified exposure. 
  • Key risks are competition and dividends.

Competitive intensity to persist. 

  • We expect the pick-up in competitive intensity to spill over to 2018, as the telcos look to defend their market share ahead of the entry of TPG Telecom (TPG) and two other mobile virtual network operators (MVNO). MyRepublic (MR), which lost out in its bid for a 4G licence (to TPG) in Dec 2016, is expected to commercialise its mobile service in 1Q18 while another MVNO that targets the foreign worker segment would likely go live by end-1Q18. 
  • The two new MVNOs, we gather, are to be hosted by StarHub. They add to Circles.Life, the first MVNO to launch its service in May 2016 (riding on M1’s network) and Zero Mobile (MVNO of Singtel), which was unveiled in Dec 2017. 
  • At its FY17 results call last September, TPG said it has awarded vendor contracts and is in the implementation phase of its network. This includes site radio network equipment, installation, data centres and core network and backhaul. It is on track to meet the Government’s deadline for nationwide outdoor coverage by end-2018. Our base case assumption is for TPG to kickstart with a pure mobile service in 2H18. 
  • As with MyRepublic, we do not rule out a bundled offering (mobile plus broadband) by TPG eventually, leveraging on the next generation national broadband network (NGNBN).

Mobile service revenue (MSR) is headed for the third consecutive year of contraction. 

  • The industry’s MSR (Big-3 telcos) fell 1.5% YoY (-0.5% QoQ) in 3Q17 – the eighth successive quarter of decline – owing to protracted usage and roaming revenue weakness. Industry MSR fell 1.8% YoY in 9M17, in line with the guidance by the telcos and our projection of a low single-digit decline for 2017. 
  • Of the three operators, M1’s MSR surged 3.4% QoQ in 3Q17 and outperformed its peers. The stronger growth was attributed to the increasing traction of Circles.Life, which has seen its market share creep up over the past four quarters, and data revenue uplift. 
  • We project industry MSR to ease a further 2-3% YoY in 2018, marking the third year of consecutive YoY decline.

SIM-only plans still attractive, but bundles the most desired. 

  • Despite the popularity of SIM-only plans, the telcos indicated that contract/handset bundled plans are still the most sought after, due to attractive re-contract offers and generous device subsidies. For example, the new iPhone X, which retails for SGD1,648 (64GB) is available on contract for SGD638 on Singtel’s Combo 3 (SGD95.90/6GB) and SGD717 on StarHub’s M Plan (SGD88/5GB). 
  • We expect the strong demand for the iPhone 8, 8 Plus and X to drive up handset subsidies over the next few quarters and compress the telco’s EBITDA margin.

Stock picking strategy. 

  • We maintain our NEUTRAL sector weighting due to the significant underperformance of the FSTTC vs the STI over the past 18-24 months. 
  • Sector valuations based on FY18F-19F EV/EBITDA are deemed fair at slightly above its 5-year historical mean and supported by average forward dividend yields of 5-5.7% – amongst the highest of the Asean-4 telcos. 
  • Our preferred exposure remains Singtel due to its diversified exposure, fairly decent average FY18F-19F dividend yield of 5.3% and its strength in the enterprise segment. 
  • Downside risk for Singtel is stronger-than-expected competition in Singapore, Australia, Indonesia and India. 
  • Key risks for the sector are competition from new entrants and potential negative dividend surprise.

Unlimited data plans return 

  • The mobile operators have re-introduced unlimited plans, more than five years after they were abolished. We view this as a tactical move to lock-in subscribers ahead of new mobile entrants. The revised plans coincided with the timing of new device launches in 4Q17 where re-contracting activities are typically the strongest. 
  • M1 was the first to unveil its upgraded 4G SIM-only plan last August, which offers unlimited data on a 12-month contract for SGD98. StarHub’s unlimited offerings, meanwhile, are confined to weekends while Singtel’s customers on the Combo 3, 6 and 12 handset bundled plans can opt for unlimited data (Data X Infinity) for an additional SGD39.90 per month. 
  • Broadly, we see the unlimited offerings as ARPU-accretive as they are higher ARPU plans (encourages up-trading). 
  • At the low end of the market, Circles.Life’s SGD28 per month data bundled contract free plan (6GB – which is an additional 2GB data on top of 4GB base data for port-in customers, 100min voice and unlimited WhatsApp) remains popular.

New players would attempt to snare share via attractive data bundles targeting the low to mid-end segment 

  • We expect the new MVNOs and TPG to focus on the low to mid-end of the market via attractive data bundles. 
  • With a good head start in disrupting the fibre broadband market via the NGNBN back in 2011, MyRepublic could look to offer a dual bundle (mobile + fixed broadband) service to differentiate itself from its MVNO peers and give its bigger rivals a run for their money. Likewise, TPG could look to also eventually bundle its mobile offering with fixed broadband as it has successfully done in the Australian market. 
  • Ahead of its 4G mobile license bid which it lost to TPG in late 2016, MyRepublic had committed to revive unlimited mobile data at SGD80 per month if it was successful in becoming the country’s fourth mobile operator. 
  • Unlimited device bundled data plans by the Big-3 telcos in Singapore are currently priced from SGD98-279.80. Unlike the incumbents, we think the new players would be less compelled to partake in aggressive handset subsidies but instead offer instalment plans for handsets or peddle mid-end phones at promotional rates.

Greater focus on enterprise solutions/Internet of Things (IoT) 

  • We expect the incumbents to focus on strengthening their share of the enterprise/information communications and technology (ICT) as well as IoT markets as they move to further diversify from legacy carriage/mobile businesses. 
  • Last December, Singtel announced strategic collaborations with Nanyang Technological University (NTU) and Agency for Science, Technology and Research (A*Star) to develop unique capabilities in artificial intelligence (AI), data analytics, robotics and IoT. The telco is looking to invest further in intellectual properties (IPs) that may arise from these partnerships. 
  • Following the earlier investments in a cyber-security outfit, Accel Systems and Technologies, StarHub recently announced the purchase of a cryptographic and digital security company, D’Crypt Pte Ltd for SGD122m to further enhance its enterprise solutions and capabilities.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-10
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.900 Same 1.900
NEUTRAL Maintain NEUTRAL 4.100 Same 4.100
NEUTRAL Maintain NEUTRAL 2.700 Same 2.700