Singapore Telcos - Maybank Kim Eng 2018-03-14: TPG Scenarios ~ The Base, The Blue Skies & The Ugly

Singapore Telcos - Maybank Kim Eng 2018-03-14: TPG Scenarios ~ The Base, The Blue Skies & The Ugly Singapore Telco Stocks TPG Telecom M1 LIMITED B2F.SI SINGTEL Z74.SI STARHUB LTD CC3.SI

Singapore Telcos - TPG Scenarios ~ The Base, The Blue Skies & The Ugly

Not a pretty picture 

  • We review Info-Communications Media Development Authority (IMDA) regulations governing the spectrum rights recently acquired by TPG Telecom, to ascertain if there is an avenue for more positive scenarios for Singapore’s incumbents. 
  • Our conclusion is that the worst case scenario of a more aggressive tariff war cannot be ruled out, thus we maintain our NEGATIVE view on the sector. De-rating catalysts are expected from the start of operations by TPG or any insight into its tariff plans and strategy. 
  • Continue to HOLD Singtel and SELL StarHub and M1.
  • Risks to our view include an early exit by TPG and/or robust growth in fixed broadband and enterprise.

Live-&-let-live scenario 

  • We currently assume that TPG’s competition will erode incumbents’ wireless revenue, though not necessarily by double digits. 
  • We estimate 2-4% declines for 2017-19E. This assumes that it and the mobile virtual number operators carve out a minority share of less than 10% of industry wireless revenue by 2019E.

Cut-loss scenario 

  • We think this scenario would provide the quickest relief for the incumbents’ operations and stock performances. According to Section 15 of the regulations, TPG can surrender or terminate its license with IMDA's approval by giving six months of advance notice. Under Section 17, there will be no compensation or refund of fees already paid. 
  • Based on IMDA’s schedule, the major licensing fees have already been paid. As any capex and start-up opex will naturally be forgone for TPG, we doubt that it would opt for such an exit without putting up a fight.

Go-all-the-way scenario 

  • As IMDA regulations discourage any sale of its licence before it fulfills all its coverage commitments, TPG may opt for accelerated service rollout and aggressive market-share grab. This could tempt an incumbent to take it out of the market. 
  • We have seen such a consolidation in the Philippines in 2012, when PLDT (TEL PM, PHP1,560, HOLD, Target Price PHP1,440) acquired unlisted Digitel. The prospect of a new entrant motivated the Philippine incumbent to take out a potential competitor in 2016, even before it started commercial operations. The revenue at risk for PLDT from aggressive competition likely provided justification for its acquisition. 
  • With Singapore’s wireless service revenue at SGD4b in CY2017, a 10% pa erosion over five years would translate to SGD1.6b of present value in potential lost revenue for the incumbents. This amount is higher than TPG's spectrum costs and capex budget of SGD300m for Singapore. Theoretically, somewhere between its costs and the industry’s destruction value is a price an incumbent could pay for an acquisition or merger to stem revenue losses.

SINGTEL (Z74.SI)  SingTel Share Price  SingTel Target Price  SingTel Analyst Reports  SingTel Corporate Actions  SingTel Announcements  SingTel Latest News  SingTel Blog Articles

Value Proposition 

  • Telco conglomerate whose companies have significant, if not leading, shares in their markets.
  • High growth phase for wireless segment has passed.
  • Competition is generally on the rise in this segment in most markets.
  • Enterprise and digital services to provide next legs of growth while cash is harvested from wireless leadership to support investments and capex.
  • Healthy balance sheet backs 60-75% dividend payout commitment on recurring profit. Non-core asset-sale proceeds are partly committed to exceptional payouts.
  • Despite its acquisitions in recent years, SingTel continues to generate 14-16% ROIC.

Swing Factors - Upside

  • Strong growth in enterprise and Digital Life to economies of scale.
  • Ebbing competitive heat in India.
  • Subsidies per smartphone drop.

Swing Factors - Downside

  • Wireless margin compression triggered either by TPG in Singapore and / or Australia or pre-emptive strikes by incumbents. These are not likely in consensus forecasts.
  • Long-term capex for 5G rollout not likely priced in.
  • Worse-than-expected cannibalisation of wireless voice, SMS and roaming by data.

M1 LIMITED (B2F.SI)  M1 Share Price  M1 Target Price  M1 Analyst Reports  M1 Corporate Actions  M1 Announcements  M1 Latest News  M1 Blog Articles

Value Proposition 

  • Historically, the purest play in the Singapore wireless sector but has been expanding more meaningfully into fixed broadband and enterprise segments.
  • The high growth phase of wireless has passed and wireless data cannibalization of voice and SMS is stifling growth.
  • Seeking to tap into Smart Nation projects to enhance its enterprise service revenues and track record.

Swing Factors - Upside

  • A benign competitive environment or a hasty retreat by new entrants would be an unexpected surprise.
  • Growth in fixed network via fixed broadband and/or enterprise could provide earnings surprises in the medium to long term.
  • Any takeover interest by a new entrant or TPG could trigger a sector re-rating.

Swing Factors - Downside

  • Should TPG resort to handset subsidies to poach subscribers an escalation in incumbents’ own efforts could take place.
  • Higher-than-expected capex pressure as a result of competition and/or 5G rollout.
  • Risks of a more rapid decline in wireless voice, SMS and roaming as data adoption gains momentum. 

STARHUB LTD (CC3.SI)  StarHub Share Price  StarHub Target Price  StarHub Analyst Reports  StarHub Corporate Actions  StarHub Announcements  StarHub Latest News  StarHub Blog Articles

Value Proposition 

  • Second-largest operator in a mature, high income ASEAN economy. Entrant of fourth operator threatens market share, returns and cost of capital.
  • Cyclical EBITDA margin within the calendar year due to smartphone launches and a largely postpaid revenue driven market that values equipment subsidies.
  • Network management experience and breadth drives increased initiatives to tap private and public enterprise contracts.
  • Dividend yield has been a key investment thesis. Despite reducing payout commitment (from SGD0.20 to SGD0.16), potential for DPS to exceed EPS remains, as in prior years.

Swing Factors - Upside

  • Enterprise segment targeting, including government contracts revolving around the Smart Nation initiatives provides source of new revenues, despite competition with SingTel.
  • Network alliance with M1 to reduce network redundancies and operating expenses, and future joint capex planning is under negotiation.

Swing Factors - Downside

  • Re-contracting/retention costs likely to rise on the back of new smartphone launches and defensive preparation against TPG’s entry.
  • Further wireless tariff package pressure on rates and/or data allocations possible with new competition.
  • Further investments in enterprise or content space that may have a gestation period before realizing returns.

Luis Hilado Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-03-14
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.630 Same 1.630
HOLD Maintain HOLD 3.690 Same 3.690
SELL Maintain SELL 2.270 Same 2.270