Singapore Telecommunications - UOB Kay Hian 2018-05-24: Optus Benefits From 3 Nationwide Outages At Telstra

Singapore Telecommunications (ST SP) - UOB Kay Hian 2018-05-24: Optus Benefits From Three Nationwide Outages At Telstra SINGTEL SGX: Z74

Singapore Telecommunications (ST SP) - Optus Benefits From 3 Nationwide Outages At Telstra

  • The three nationwide outages suffered by Telstra in May will dent its reputation for network quality and reliability built over the years. Optus is likely to maintain its growth momentum and continue to gain market share at the expense of Telstra.
  • Optus has enhanced its network coverage and gained traction in regional Australia. It also differentiates through bundling captivating content, such as EPL, NatGeo and Cricket Australia.
  • Optus is the largest contributor to earnings accounting for 28.5% of Singtel group PBT in 4QFY18. Maintain BUY and target price of S$4.22.


  • Telstra’s mobile network suffered three outages in May.
  • A third nationwide outage enraged Telstra’s mobile customers. On 21 May 18, Telstra said its mobile network was down in Melbourne, Canberra, Sydney, Hobart, Brisbane and Perth. Many customers across Australia experienced difficulties making calls and connecting to the Internet. According to the live outage map by Assie Outages, the network disruption occurred at all major capital cities.
  • The network outage started at about 10am on Monday. The mobile network failed to switch over from faulty equipment to back-up equipment on stand-by. Services were progressively restored after the impacted infrastructure were identified at 11:40am. According to Telstra, full services were restored two hours later at 1:40pm.
  • Investigation still on-going to identify root cause of software fault. Telstra’s Group Managing Director of Networks, Mike Wright, explained that a fault in its core network caused problems with connectivity at the 4G layer of its mobile network at around 10am. All its customers had to connect to the 3G layer, which caused a huge shift in traffic. Customers suffered dropped calls and intermittently lost service as the 3G layer was over-loaded. Telstra is still investigating the root cause of the software fault.
  • Customers inconvenienced and disappointed. Many Telstra customers aired their frustration on social media. Many customers threatened to switch to rival operators.
  • The first outage on 1 May 18. Telstra’s mobile network experienced outage caused by “technical changes” made ahead of upgrades to mobile traffic control equipment at its Exhibition Street exchange in Melbourne. Customers across Australia were unable to make or receive voice calls through its 4G network for three hours from 1pm to 4pm.
  • The second outage on 7 May 18. A suspected lighting strike is believed to have knocked out Telstra’s national triple zero emergency line. New South Wales Police said the outage affected people trying to call triple zero (000) or the Police Assistance Line (131 444). The government is formally investigating the triple zero incident.
  • Telstra share price has dropped to a 7-year low. The stock is dogged by speculations of downgrade of credit ratings and cut in dividend payout.


  • Optus benefitting at Telstra’s expense. Optus is the largest contributor to earnings accounting for 28.5% of group PBT in 4QFY18. Optus gained market share with a net addition of 101,000 post-paid mobile customers in 4QFY18. Post-paid ARPU was also stable at A$44. The widespread disappointment caused by the series of three nationwide outages suffered by Telstra in May is likely to result in consumers flocking to Optus in 1QFY19.
  • Optus has adopted the right strategy in Australia:
    1. Focus on network quality. Optus has stepped up capex over the past three years to enhance the breadth and depth of its coverage. Optus has accelerated its rollout of 4G in metropolitan and regional areas after the release of 700MHz frequency spectrum in Jan 15. It utilises its 700MHz spectrum to extend coverage to fringe cities in rural areas and aims to achieve market share of 30% for rural areas.
    2. Differentiating through content. Optus maintains sticky customer relationships and differentiates by bundling mobile, fixed broadband and entertainment offerings. It offers captivating content, such as English Premier League (EPL), National Geography (NatGeo) and Cricket Australia.
  • Providing clarity and certainty to future dividends. Management intends to maintain ordinary dividends at 17.5 S cents for the next two financial years and, thereafter, revert back to paying 60-75% of underlying net profit. We see the promise as a demonstration of management’s confidence that group earnings would not be unduly affected by increased competition in Singapore and Australia.


  • We maintain our earnings forecasts.


  • Maintain BUY. Our target price is S$4.22, based on DCF (required rate of return: 6.25%, growth: 1.8%).


  • SingTel is the least affected by a fourth mobile operator in Singapore as overseas businesses accounts for about 70% of its bottom-line.
  • SingTel is the largest and most liquid defensive stock listed on the Singapore Exchange and deserves to trade at a premium.

Jonathan Koh CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-24
SGX Stock Analyst Report BUY Maintain BUY 4.220 Same 4.220