Telecommunications – Singapore - UOB Kay Hian 2018-03-12: Searching For Answers From Historical Precedents.

Telecommunications – Singapore - UOB Kay Hian 2018-03-12: Searching For Answers From Historical Precedents Singapore Telcos Stock NETLINK NBN TRUST CJLU.SI SINGTEL Z74.SI M1 LIMITED B2F.SI STARHUB LTD CC3.SI

Telecommunications – Singapore - Searching For Answers From Historical Precedents

  • Investors should not catch a falling knife by investing before TPG launches its mobile services. Share prices should bottom during the second month after TPG’s launch, and start to rebound in the third month after TPG’s launch. 
  • Maintain MARKET WEIGHT. 
  • BUY Singtel (Target: S$4.40) due to its geographical diversification and growth from Indonesia, India and Thailand. 
  • Yield-oriented investors should also consider NetLink NBN Trust (Target: S$0.93).



WHAT’S NEW


Using StarHub’s launch as a case study. 

  • StarHub launched its mobile services with a 3G network on 1 Apr 00. 15,000 Singaporeans participated in StarHub’s mobile trial from 15 Mar 00 to 30 Apr 00. They were provided with free usage of a mobile phone and free local calls during the trial. Pre-registration for the mobile trial started on 26 Jan 00.
  • StarHub captured the attention of consumers as it introduced innovative new features, such as “per second billing”, “free incoming calls” and “airtime rollover”.
  • We analysed how Singtel’s share price responded during the three months before and after StarHub’s launch. M1 launched its mobile services in Apr 97 and listed on SGX Mainboard in Dec 02. Thus, we are not able to analyse how M1’s share prices reacted when StarHub launched its mobile services.

Do not front run TPG’s launch. 

  • Singtel's share price dropped 29% during the three months before StarHub’s launch but recovered 3.7% during the three months after StarHub’s launch (April: +0.8%, May: -4.5% and June: +7.7%). 
  • Relative to FSSTI, Singtel underperformed by 14.2% before StarHub’s launch but outperformed by 6.5% after StarHub’s launch. Singtel experienced significant de-rating in terms of PE, P/B and EV/EVITDA during the three months before StarHub’s launch.

When to bottom fish? 

  • Investors should not catch a falling knife during the three months before TPG launches its mobile services. Singtel’s share price bottomed on the second month (late-May) after StarHub’s launch and rebounded 7.7% on the third month after StarHub’s launch (June). Thus, the best time to bottom fish in the telco sector would be the second month after TPG’s launch.

This time, it’s different. 

  • If we include a proportionate share of associates’ revenue, overseas operations accounted for 25% of Singtel’s operating revenue for financial year ending Mar 00. 
  • Back then, Singtel had yet to acquire Optus and Telkomsel. Singtel is now more geographically diversified. For 9MFY18, overseas operations accounted for 63% of group pre-tax profits.


ACTION 


Maintain MARKET WEIGHT. 

  • We have turned defensive on the telco sector and brace ourselves for the impending entry of TPG Telecom as the fourth mobile operator in Singapore. 
  • BUY Singtel (Target: S$4.40) due to its geographical diversification and growth from Indonesia, India and Thailand. 
  • Yield-oriented investors should also consider NetLink NBN Trust (Target: S$0.93).

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 potential damage caused by the entry of TPG to some extent.

Singtel (Rating: BUY/ Target Price: S$4.40) 

  • Singtel provides a defensive shelter due to its geographical diversification. Mobile business in Singapore accounts for only 7% of group revenue if we include its proportionate share of its associates’ revenue.
  • Telkomsel expanded its subscriber base at a double-digit rate of 13% in 3QFY18. Bharti Airtel will benefit from the massive consolidation from 11 to about six mobile players in India. AIS has successfully expanded in 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. NetLink provides resilient dividend yield of 5.9%.
  • NetLink will benefit from the successful launch of TPG Telecom as Singapore’s fourth mobile operator. It provides NBAP connections for TPG’s backhaul transmission network.

M1 (Rating: HOLD/ Target Price: S$1.84) 

  • 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.
  • Maintain HOLD. Mobile business in Singapore accounted for a whopping 76.7% of its service revenue in 4Q17.

StarHub (Rating: HOLD/ Target Price: S$2.70) 

  • StarHub has made good progress in fixed enterprise business. It has acquired Accel Systems & Technologies to beef up capabilities in cyber security and system integration.
  • Revenue from fixed enterprise (data & Internet) grew 13% y-o-y in 3Q17.
  • Maintain HOLD due to StarHub’s more diversified business mix. The stock also provides dividend payout of 16 S cents/share and yield of 6.5%.


SECTOR CATALYSTS 

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


ASSUMPTION CHANGES 

  • We maintain our existing earnings forecast.


RISKS 

  • Competition and pricing erosion worsening more than anticipated post entry of TPG.
  • M1 and StarHub not closing the deal or achieving the desired cost savings from network sharing.







Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-03-12
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.930 Same 0.930
BUY Maintain BUY 4.400 Same 4.400
HOLD Maintain HOLD 1.840 Same 1.840
HOLD Maintain HOLD 2.700 Same 2.700



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