Singapore Telecommunications (M1 vs SingTel vs StarHub) - CIMB Research 2018-03-14: Finally At The Battle Lines

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M1 vs SingTel vs StarHub Singapore Telco Stocks M1 LIMITED B2F.SI SINGTEL Z74.SI STARHUB LTD CC3.SI

Telecommunications Singapore - Finally At The Battle Lines

• Mobile revenue to stay under pressure in FY18F.
• Bright prospects for Fixed Enterprise; Still challenging for Pay TV & Broadband. 
• M1 has the best FY18F core EPS growth, but Singtel is much better over the medium-term.
• M1 and StarHub offer the highest dividend yields in FY18F. 

Mobile revenue to stay under pressure in FY18F. 

Slightly declining mobile revenue in FY18F. 

• We forecast Singapore mobile service revenue to ease by a milder 1.1% y-o-y this year (2016: -2.9%, 2017: -2.3%), before falling by 4.5%-4.7% y-o-y in 2019-20F due to more intense competition arising from TPG’s market entry. 
• We believe the subscription fee hikes by StarHub (STH SP, HOLD, Target Price: S$2.70) and Singtel (ST SP, ADD, Target Price: S$4.00) last Sep should have a positive revenue effect this year as subscribers gradually re-contract into the revised higher-priced postpaid plans, with some partial offset for the latter from the loss of voice overages due to the inclusion of unlimited Voice calls for Combo 3 plans and up. Nevertheless, in FY18F we expect
  1. international roaming revenue to continue falling,
  2. slightly more competitive pressure arising from the entry of more Mobile Virtual Network Operators (MVNO) into the market and
  3. more visible revenue dilution from greater take-up of SIM-only plans.

More MVNOs entering the market 

• Zero Mobile (not listed) entered the mobile market via a soft launch in Dec 2017 to become Singapore’s second MVNO, after Circles.Life (not listed) launched its service in May 2016. 
• Zero Mobile, an Australian tech start-up, has a wholesale agreement with Singtel and launched its service approximately two months after it received its Service Based Operator licence to operate as an MVNO by the regulator in late-Sep 2017. It currently offers two plans without contract:
  1. Zero 40: S$42.50/month for 9Gb and unlimited calls and
  2. Zero X: S$75 for unlimited 4G data, calls and SMS. 
• Subscribers can earn S$5/month of credit for every sub that signs up based on their referral (and that remains active), potentially reducing their monthly bill to zero.
• We think Zero 40 is fairly comparable to the SIM-only offers from existing service providers, with any price differentials squared off against differences in data/voice quotas. Zero X looks more attractive than existing high-tier SIM-only offerings from the incumbents (e.g. M1’s mySIM+ 98), in our view. However, we believe the addressable market for an unlimited mobile data product is small in Singapore, given the affordability of ultra high-speed fiber broadband services.
• For subscribers who do not need unlimited data, they can opt instead for Circles.Life’s much cheaper S$48/month plan for 26Gb.
• Zero1 (not listed), Singapore’s third MVNO also riding on Singtel’s network, launched its mobile service in Mar 2018. At the moment, it only has one plan on offer, S$30/month for 3Gb of 4G data, with unlimited data usage thereafter at managed speeds. While Zero1 does not spell out the exact speeds after 3Gb, it says WhatsApp, Facebook, Instagram, Spotify and YouTube will work normally.
• We think Zero1’s plan is fairly interesting and fills a niche in the market, but does not necessarily undercut incumbents’ pricing (given the trade-offs).
• We believe that there could potentially be a few more MVNOs that will enter the market this year, based on our discussions with industry players. One of the MVNOs that is set to launch in 1Q-2Q18 is MyRepublic (not listed), which we believe will ride on StarHub’s network. MyRepublic had previously announced that it will launch its service in Oct 2017, which was then delayed possibly due to the extensive amount of time needed to establish a thick MVNO operating structure and crafting unique/attractive offerings based on the commercial terms of its wholesale agreement with the host network.
• The entry of more MVNOs into the Singapore mobile market would add some competitive pressure this year, though not too significantly, in our view. 
• The impact would depend on how the host networks structure their wholesale agreements with MVNOs, which would ultimately determine how aggressively MVNOs can price their services. We think it is possible that host networks will be careful in setting the commercial terms, with mechanisms in place to revise these terms to give MVNOs more flexibility to compete against TPG when it enters the market. However, we believe a more crowded MVNO market could potentially impact Circles.Life and M1, which is its host network. Since its launch in May 2016, industry players concur that Circles.Life has had some traction in the market, and has been one of the key factors driving M1’s postpaid subscribers growth and revenue since 3Q16. 
• For subscribers that are attracted to MVNOs’ proposition (e.g. more data for the same price, novel service subscription models, etc.) and are okay with a no-frills all-digital approach to customer service/support, we expect they will have more choices this year aside from Circles.Life.

SIM-only revenue dilution could be more visible 

• In the retail consumer segment, telcos have been reporting since 2017 that about a third of their quarterly gross adds are SIM-only subscribers. 
• As SIM-only subscription fees are approximately half that of two-year device-bundled contracts, we believe they will start to have a more significant dilutive impact on Singapore telcos’ total mobile service revenue, as the percentage of SIM-only subscribers in the overall SIM card base grows from low- to mid-single digits as at end2017 to high-single digits by end-2018F. However, as SIM-only plans do not come with handset subsidies, the impact on EBITDA should only be slightly negative to neutral, based on our calculations.

TPG should launch its service by year-end 

• We expect TPG to commercially launch its service by Dec 2018F, in line with its licence obligations set by the regulator. In the run-up to that, we may hear more marketing noise in 2H18F from TPG as it tries to generate awareness and publicity. In addition to an MVNO strategy, we see incumbents continuing their efforts this year to lock in customers on two-year contracts, with handsets and other value-added services. 
• We think incumbents are less likely to pull off further subscription fee hikes this year, in order to avoid losing subscribers ahead of TPG’s service launch.

StarHub-M1 network sharing collaboration 

• It has been more than a year since StarHub and M1 announced the signing of an MOU on 12 Jan 2017 to study further potential collaboration in mobile infrastructure sharing, with a focus on sharing radio access network, backhaul and access assets. During its 4Q17 conference call, M1 said that it is exploring deeper collaboration on network sharing with StarHub, by expanding from a common antenna solution to joint upgrading of 4.5G indoor antenna systems at large buildings. 
• At this stage, we believe the collaboration is still at the very initial stages, focusing on lower hanging fruit, before both parties sign a definitive agreement on larger network sharing initiatives. M1 said that the capex savings from its collaboration with StarHub would be realised progressively over the next few years.

Bright prospects for Fixed Enterprise; Still challenging for Pay TV & Broadband 

Fixed Enterprise Business to grow healthily 

• We expect the Fixed Enterprise ICT business to be the only business segment to post healthy growth for Singapore telcos in FY18-20F, as Enterprises/SMEs embark on the digitalisation of their business processes and due to government spend on Smart Nation initiatives. We forecast Singtel’s ICT revenues (Managed Services & Business Solutions) in FY03/19F to grow by 5.5%, partly driven by growing demand for cybersecurity services, although its overall Enterprise revenue is only expected to grow by 1.2% due to price erosion in the traditional carriage business. 
• Meanwhile, we project StarHub’s Fixed Network Services revenue is to jump 11.4% y-o-y in FY18F, partly due to the full year and 11-month consolidation of ASTL and D’Crypt, respectively. M1 does not break down its Fixed Services revenue (FY18F: +17.8% y-o-y) into Residential and Enterprise segments, but we believe the latter should also grow, driven by contracts from the government sector and SMEs.

Pay TV: No stopping the cord-cutting trend 

• Industry pay TV subscribers should continue to trend downwards this year, in our view, as subscribers viewing behaviour continues to evolve favourably towards over-the-top (OTT) platforms (e.g. Netflix) and also given the high occurrence of piracy in the market. In response to this, StarHub, the leading pay TV operator in the market, negotiates for lower rights fees upon renewal for channels with relatively poor viewership, or removes the channel altogether from its offering if the content providers refuse, e.g. NBA channel rights were not renewed by StarHub when it expired in Oct 2016. In the latter case, some subscribers that watch these channels may choose to terminate their StarHub pay TV subscription once these channels are no longer available on the platform.
• From a peak of 545k pay TV subscribers in 2Q15, StarHub has been reporting declining subs every quarter to 458k as at 4Q17, or an average loss of 9k subs/quarter. We expect StarHub’s pay TV subscribers to further decline by 7.6% y-o-y in 2018F as the cord-cutting trend continues. We also forecast a 2% ARPU erosion to S$50/month. Based on this, we expect StarHub’s pay TV revenue to decline by 8.1% y-o-y in FY18F.
• On the other hand, Singtel’s pay TV subscribers have declined by a much milder 20k from its peak of 424k in 3QFY16 (Oct-Dec 2015) to 401k in 3QFY18 (Oct-Dec 2017), or an average loss of 3k subs/quarter. We believe that Singtel’s broadcasting of the very popular British Premier League (BPL) live football matches is a key factor that keeps subscribers on its platform. The other possible reason for Singtel’s milder decline in pay TV subscribers could be its efforts to lock in subscribers when it offered free viewing of the 2016 UEFA European Championship football matches to customers that signed up for or renewed their Trio, Variety or Value packs for 24 months (applicable to customers with ongoing contracts as well) in Apr 2016. Still, we expect Singtel’s pay TV subscribers base to be subject to the prevailing cord-cutting trend and for it to decline by 3.8% in FY03/19F, while ARPU should be stable at S$42/month. We project Singtel’s pay TV revenue to fall 2.4% y-o-y in FY03/19F.

Residential Broadband: Little growth with possible new competition 

• For the broadband business, we expect industry revenue to grow by the low single-digits in 2018F, driven by continued upgrades by subscribers to higher-speed fiber packages. However, the latter’s positive impact should be milder as the migration of subscribers from ADSL/cable to fiber is already largely in advanced stages as at end-2017, with c.93% of total customers on fiber. In addition, we see the smaller players maintaining their competitive pricing at around S$30-40/month (after rebates) for 300-1Gbps packages. 
• Meanwhile, we also expect TPG to launch broadband services at some point, although this may come only after its mobile service launch.

A relatively quiet year for regulatory developments 

COPIF revision may be finalised in 1H18F 

• With no new spectrum auctions this year (the next one will be for 2100MHz licence expiry in 2021), we expect the regulatory landscape to be relatively quiet compared to 2014-17. The only outstanding regulatory development is the proposed revision of the existing Code of Practice for Info-communication Facilities in Buildings (COPIF 2013). 
• Under the proposed revision, the Info-communications Media Development Authority (IMDA) mandates that building developers/owners allocate the use of rooftop space on a rent-free basis to mobile network operators (MNOs) as the preferred Mobile Deployment Space (MDS) location. This will allow MNOs to use the rooftop MDS to house equipment for the provision of in-building mobile coverage and outside the building (External Areas). 
• IMDA intends for existing COPIF principles of equal sharing of MDS among licensees to continue to apply, even with the entry of the fourth telco (i.e. TPG). The public consultation on the proposed revision of COPIF 2013 closed on 21 Jun 2017, with the final decision possibly by 1H18F. The revision to COPIF 2013 would help to facilitate the rollout of TPG’s network, in our view.

700MHz payment possibly due in mid-2018F but could also be deferred 

• While there are no spectrum auctions this year, telcos that were allocated the 700MHz spectrum during the general spectrum auction in early-Apr 2017 may have to pay the upfront fees in mid-2018F, which is six months prior to the commencement of licence rights in Jan 2019. Singtel, StarHub and M1 were allocated 40MHz, 30MHz and 20MHz of bandwidth for S$376m, S$282m and S$188m, respectively. However, the commencement date of the 700MHz licence rights has not been finalised, as there are some uncertainties regarding the timeline for analogue switch-off (ASO) and full migration to Digital Terrestrial Television (DTT) in neighbouring countries. 
• Malaysia recently announced the delay in ASO to a yet unspecified date (previous: mid-2018), while Indonesia is quite unlikely to complete the ASO process in 2018 or even 2019 due to technical and legal issues, in our view. As such, we believe the use of the 700MHz spectrum could suffer radio interferences in areas close to coastal borders.

Earnings Outlook & Catalysts 

M1 has the best FY18F core EPS growth, but Singtel is much better over the medium-term 

• For FY18F, we forecast M1 to have the best core EPS growth among Singapore telcos, up 5.2% y-o-y, mainly driven by robust Fixed Services revenue growth and assuming a normalisation in its effective tax rate to 17.0% (FY17: 18.8%). That said, we expect its core EPS to be hit the hardest in FY19/20F, down 22.3%/15.4% y-o-y, upon TPG’s market entry.
• Singtel could see the second fastest core EPS growth in FY03/19F, albeit by a modest 2.2%, driven by lower Digital Life losses and some recovery in associate earnings but partially offset by higher depreciation and interest cost (as a result of high capex spending in Singapore and Australia over the past three years). We see stronger earnings growth of 7.4%/3.3% in FY20/21F, mainly on stronger associate contribution (Bharti (BHARTI IN, not rated), Telkomsel) and more stable depreciation and interest cost as capex eases.
• We forecast StarHub to have the weakest core EPS growth of 1.2% in FY18F, dragged by the absence of National Broadband Network (NBN) grants, higher depreciation and interest cost. For FY19/20F, we see core EPS falling 11.5%/18.6% y-o-y due to more intense mobile competition.

M1 and StarHub offer the highest dividend yields in FY18F 

• M1 and StarHub offer the highest dividend yields in FY18F at 6.6% and 6.6%, respectively. Based on a stable 80% payout ratio, we see M1’s yields declining to 4.3% by FY20F. For StarHub, we expect it to sustain DPS at S$0.16 p.a. in FY19-20F, supported by its less leveraged balance sheet (end-FY17: net debt/EBITDA of 1.0x).
• While Singtel offers a lower FY03/19F yield of 5.1% vs. its smaller peers, this rises to an attractive 5.5-5.7% in FY20-21F. This would be higher than M1’s FY19-20F yield and, while still lower than StarHub’s, there is arguably much less risk.

Potential earnings surprises and share price catalysts 

• Compared to Bloomberg consensus estimates, our FY19-20F reported EPS for Singtel is lower by 6-7%. We believe this is largely because we have assumed more conservative earnings contribution from Bharti (we applied a 20% discount to consensus forecasts) and also for Optus (high interest cost as cash capex remains high into FY19F). This also probably explains why consensus target price is slightly higher (+3%) than ours. While there is a chance that Singtel may have missed consensus estimates, we argue that investors have not even begun to price in an earnings recovery in FY19-20F, as suggested by its 12- month share price underperformance (which has been in line with its weaker 9MFY18 earnings).
• On the other hand, our FY18F reported EPS for M1 and StarHub are 9-12% higher than Bloomberg consensus estimates, possibly due to our less pessimistic view on mobile competition this year and higher Fixed Enterprise revenue growth rates. However, we believe that the market will focus more critically on FY19F reported EPS, which would be the first full year of competition from TPG, and here we are only 3-4% higher vs. consensus.

Sector View & Company Ratings 

Maintain Neutral on Singapore telcos 

• M1’s share price/ StarHub’s share price/ Singtel’s share price have de-rated by 14%/16%/14% over the past 12 months (past three years: -53%/-43%/-17%) on weaker FY17 earnings, which missed our expectations. We expect FY18F to be another tough year for earnings due to rising competitive pressure with the entry of more MVNOs and TPG’s impending service launch by end-2018. 
• After substantial declines, M1’s/StarHub’s current share prices are near/below our target prices. However, they are still above our bear-case fair values, suggesting that it is not yet worthwhile to invest in these stocks, in our view.

Singtel (Rating: ADD, Target Price: S$4.00): 

• We forecast Singtel’s core EPS to fall 6.8% in FY18F due to declining Optus earnings and lower associate contributions. We then see 2.2%/7.4% y-o-y growth in FY19F/20F due to
  1. recovery in associate earnings (Bharti, Telkomsel),
  2. narrower Digital Life losses and
  3. rebound in Optus earnings in FY20F. 
• Singtel’s FY18F EV/OpFCF of 16.4x is in line with the ASEAN telco average of 16.6x, supported by attractive FY18-20F yields of 4.9- 5.4%. A potential re-rating catalyst is the earnings rebound in FY19-20F.
• Downside risk is more intense competition in Australia, India and Singapore.
• Maintain ADD on Singtel, which is our preferred Singapore telco pick, with an unchanged SOP-based target price of S$4.00.

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

• We forecast core EPS to inch up 1.2% in FY18F and fall 11.5%/18.6% in FY19/20F. While we see healthy Fixed Enterprise revenue growth, it may be unable to fully offset declining mobile revenues as competition intensifies with TPG’s entry and weaker pay TV and broadband businesses. 
• We forecast FY18-20F DPS at S$0.16 p.a., as net debt/EBITDA could remain below 2x over the period. 
• We maintain our HOLD rating with an unchanged DCF-based target price of S$2.70, with a good entry point below S$2.40 (bear case) and exit point above S$3.00 (bull case).

M1 (Rating: HOLD, Target Price: S$1.85): 

• We forecast M1’s core EPS to rise 5.4% in FY18F (led by higher fixed services revenue), then fall 22.3%/15.4% in FY19F/20F on more intense mobile competition and amortisation of 700MHz spectrum rights (ex700MHz: -14.7%/-14.3%). M1’s 11.1x FY18F EV/OpFCF is at a 33% discount to ASEAN telcos, which we think is justified given its prospects of declining earnings. 
• Our scenario analysis on the possible earnings impact from TPG suggests that a good entry point would be below S$1.50 (bear case) and exit point above S$2.20 (bull case). Upside/downside risks are better/worse-than-expected impact from TPG’s entry.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2018-03-14

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.850 Same 1.850

ADD Maintain ADD 4.000 Same 4.000

HOLD Maintain HOLD 2.700 Same 2.700