Telecommunications – Singapore - UOB Kay Hian 2018-01-12: The Year Of Trepidation

Telecommunications – Singapore - UOB Kay Hian 2018-01-12: The Year Of Trepidation Singapore Telcos Stock SINGTEL Z74.SI M1 LIMITED B2F.SI STARHUB LTD CC3.SI NETLINK NBN TRUST CJLU.SI

Telecommunications – Singapore - The Year Of Trepidation

  • We have turned defensive on the telco sector as our channel checks indicate TPG’s network deployment has progressed smoothly and it is on track for the launch of commercial services by end-18. 
  • BUY Singtel (Target Price: S$4.53) due to its geographical diversification and growth from Indonesia, India and Thailand. 
  • Yield-oriented investors should consider NetLink NBN Trust (Target Price: S$0.93). 
  • Downgrade the sector to MARKET WEIGHT.


Earnest preparation underway at TPG Telecom. 

  • TPG Telecom became the 4th mobile operator in Singapore when it secured 20MHz of 900MHz and 40MHz of 2300MHz spectrum at a winning bid of S$105m during the New Entrant Spectrum Auction conducted in Dec 16. It subsequently secured another 10MHz of the 2500MHz spectrum at a cost of S$23.8m during the General Spectrum Auction in Apr 17. 
  • TPG has already awarded contracts to key vendors and work is underway to roll out its radio network, data centres and core & backhaul networks in Singapore.

TPG Telecom faces daunting challenges on the ground. 

  • It has to secure roof-top space to install an estimated 3,000 base stations by end-20. It has to roll out its own common antenna systems (CAS) at commercial buildings, such as retail malls, office towers and industrial buildings. Fortunately, TPG is able to utilise NetLink NBN Trust to provide non-building access points (NBAPs) at a regulated price of S$73.80/month for its backhaul transmission network. 
  • Our channel checks suggest that TPG’s network deployment has progressed smoothly. It is on track for the launch of commercial services and to meet requirements for nationwide coverage by Dec 18.

TPG able to weather a protracted battle. 

  • TPG is the second-largest fixed broadband player (in Australia) with market share of 27%. It owns 11,000km of fibre optics and 410 exchanges at major metropolitan cities in Australia. 
  • It achieved revenue of A$2,491m, EBITDA of A$891m and net profit of A$414m in the financial year ending Jul 17. EBITDA margin was healthy at 36%. It also generated strong cash flow from operations at A$723m.

TPG has low gearing with net debt/EBITDA at 0.96x as of Jul 17. 

  • Banks provided for additional debt facilities of A$750m. Maturities are extended to 3-7 years and the earliest debt maturity is in Sep 20. 
  • The company has also cut its final dividend for 2HFY17 from 7.5 AU cents to 2.0 AU cents so as to deploy more resources for the roll-out of mobile networks.

Slew of MVNOs coming through. 

  • Singapore has attracted a slew of start-ups offering mobile services based on the mobile virtual network operator (MVNO) model. MVNO usually targets niche and customised segments. However, the cumulative impact of three new MVNOs could create some headaches and headwinds for the incumbents: 
    1. Circles.Life launched commercial services hosted by M1 in May 16. It focuses on SIM-only post-paid mobile services. It differentiates itself by providing unlimited messaging, voice calls and sending of videos on Whatsapp. It has a user friendly mobile app CirclesCare, which customers can access to modify their service plans.
    2. Zero Mobile launched commercial services in Dec 17. It charges S$45/month for unlimited local calls and 6GB of mobile data. Customers also have to pay a sign-up fee of S$18, which covers the costs for postage and SIM cards. Customers get a recurring credit of S$9/month for every referral. Thus, customers get to enjoy free mobile services with five successful referrals.
    3. MyRepublic, who lost out to TPG Telecom in the race to become the 4th mobile operator, is currently conducting trials and plans to launch MVNO services in Mar 18. It intends to cross-sell to its base of 70,000 fibre broadband subscribers. MyRepublic plans to launch its IPO towards 4Q18 or 1Q19.


Downgrade to MARKET WEIGHT. 

  • We have turned defensive and brace ourselves for the impending entry of TPG Telecom as the 4th mobile operator in Singapore.

Singtel (Rating: BUY/ Target Price: S$4.53) 

  • Singtel provides a defensive shelter due to its geographical diversification. Its mobile business in Singapore accounts for only 7% of group revenue if we include its proportionate share of associates’ revenue.
  • Telkomsel expanded its subscriber base at a double-digit rate of 16% in 2QFY18. Bharti Airtel will benefit from massive consolidation from 11 to about six mobile players in India. AIS has successfully expanded into fibre broadband services.

NetLink NBN Trust (Rating: BUY/ Target Price: S$0.93) 

  • NetLink NBN Trust monopolises the provisions of wholesale fibre connections for residential premises, which provides the mainstay 78% of its revenue. Yield-oriented investors should also consider NetLink, which provides a resilient dividend yield of 5.8%.
  • NetLink benefits from the successful launch of TPG Telecom as the 4th mobile operator. It provides NBAP connections for TPG’s backhaul transmission network.

The saving grace for M1 and StarHub. 

  • M1’s share price and StarHub’s share price corrected 55% and 34% respectively from their peaks of S$3.99 and S$4.46 in 1H15, which already reflected the expected damage caused by the entry of TPG to some extent.

M1 (Rating: HOLD/ Target Price: S$1.75) 

  • M1 is more susceptible to competition from TPG due to its focus on the youth market. Conversely, Singtel and StarHub are more entrenched in serving corporate customers. Singtel and StarHub are also better able to bundle multiple services.
  • Downgrade M1 to HOLD as its mobile business in Singapore accounted for a whopping 78% of its service revenue in 3Q17. We tweaked our discount rate higher from 7.25% to 7.5% and growth assumption lower from 1.5% to 1.0% in our DCF valuation. Entry price: S$1.68.

StarHub (Rating: HOLD/ Target Price: S$2.90) 

  • StarHub has made good progress in its fixed enterprise business. It has acquired Accel Systems and Technologies to beef up capabilities in cyber security and system integration. Revenue from fixed enterprise (data and Internet) grew 13% yoy in 3Q17.
  • Maintain HOLD due to StarHub’s more diversified business mix. The stock also provides a dividend payout of 16 S cents/share and yield of 5.5%. Entry price: S$2.78.


  • M1 and StarHub collaborating on network sharing.
  • Impending entry of TPG Telecom as the 4th mobile operator in 4Q18.


  • We maintain our existing earnings forecasts.


  • Competition and pricing erosion worsening more than expected post entry of TPG.
  • If M1 and StarHub do not close the deal or achieve the desired cost savings from network sharing.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-01-12
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.530 Same 4.530
HOLD Downgrade BUY 1.950 Same 1.950
HOLD Maintain HOLD 2.620 Same 2.620
BUY Maintain BUY 0.930 Same 0.930