Navigate Singapore 2019 ~ Telcos - CGS-CIMB Research 2018-11-29: UNDERWEIGHT

Navigate Singapore 2019 ~ Telcos - CGS-CIMB Research  | SGinvestors.io SINGTEL (SGX:Z74) STARHUB LTD (SGX:CC3) M1 LIMITED (SGX:B2F)

Navigate Singapore 2019 ~ Telcos - UNDERWEIGHT

Positive Trends

Enterprise fixed revenue stayed healthy.

  • STARHUB LTD (SGX:CC3) reported milder but still solid growth of 13.0% y-o-y (+1.7% q-o-q) for this business in 3Q18, as higher managed services revenue was partly offset by lower interconnection and international voice revenue.
  • Meanwhile, M1 LIMITED (SGX:B2F)’s fixed services revenue (including retail broadband) was up 26.0% y-o-y (+3.0% q-o-q), supported by its higher fibre customer base as well as contribution from corporate projects.

Cost cuts in the pipeline at StarHub to buffer revenue pressure.

  • In early-Oct, StarHub announced that it expects to realise S$210m in gross savings over a three-year period via an operational efficiency programme, which includes the layoff of 300 employees (11.8% of its end-FY17 workforce). StarHub is also targeting savings in procurement activities, leasing costs, network/systems repairs and maintenance and sales and distribution expenses.

Negative Trends

Industry mobile service revenue continued to decline

  • Industry mobile service revenue continued to decline, down 4.5% y-o-y in 3Q18, driven by declines in voice and IDD usage, greater device subsidies (amortised against service revenues under SFRS 15) and a higher mix of SIM-only plans. After a seasonally strong 2Q18, industry mobile service revenue eased 1.7% q-o-q.

Industry pay TV subs declined for the 12th consecutive quarter

  • Industry pay TV subs declined for the 12th consecutive quarter, down 19k q-o-q (-2.3%), due to the shift to alternative OTT video platforms and impact of an increase in piracy. Despite the boost from the World Cup, Pay TV ARPU was flat y-o-y due to the rebates given to subs by StarHub. q-o-q, ARPU was down 5.2% q-o-q. Pay TV revenue dipped 3.2% y-o-y (-6.9% q-o-q).

EBITDA margin lower y-o-y

  • Service EBITDA margin for SINGTEL (SGX:Z74) (Singapore) took a turn for the worse, falling 2.9% pts y-o-y, while StarHub’s and M1’s eased a further 2.3% pts y-o-y and 2.4% pts y-o-y, respectively, in 3Q18. This was attributed to the decline in mobile service revenue and a higher mix of fixed enterprise/ICT revenues (which earn smaller margins).

Looking To 2019

  • Overall, the earnings trend in the Singapore telco sector is likely to remain weak in 4Q18F, with more competitive pressure from new mobile virtual network operator (MVNOs) (e.g. MyRepublic) and the launch of TPG’s service before year-end. Investors may also prefer to wait on the sidelines until they see TPG’s launch offers, as well as its market traction by mid-2019.
  • Our telco analyst, Foong Choong Chen, has assumed 10% p.a. negative impact from TPG’s entry on Singapore’s mobile ARPU (ex-roaming), and we forecast the industry’s mobile service revenue to decline by 8.0%/6.8% y-o-y in FY19/20F before stabilising in FY21F. Based on our estimates, overall FY19/20F Singapore service revenue is expected to be largely steady at 0.1%/0.7% y-o-y due to growth in enterprise fixed revenue.
  • While growth in enterprise fixed revenue should help to cushion the drop in mobile service revenue, we note that the enterprise fixed business generally earns a lower EBITDA margin (mid-teens vs. mobile services’ 35-40%). As such, we forecast industry EBITDA (Singapore only) to fall by 5.0%/4.9% in FY19/20F.

Stock Preference

  • If TPG tries to minimise start-up losses/ additional network investment by launching with offers that are not too aggressive or different from those of the incumbents/ MVNOs, it is possible that it would not get much market traction. If the impact is less than feared, the Singapore telco sector could re-rate.

Singtel (SGX:Z74, Rating: ADD, Target Price: S$3.40):

  • We forecast SingTel’s core EPS to fall 17.5% y-o-y in FY19F, then grow 2.5%/5.6% y-o-y in FY20F/21F due to:
    1. recovery in associate earnings (Bharti, Telkomsel), and
    2. narrower Digital Life (wholly-owned subsidiary) losses.
  • Among the incumbents, we think that SingTel is still the most resilient against intense competition in the Singapore mobile market, as well as to any price shocks from the 2100MHz/3.5GHz spectrum auctions. SingTel is trading at an FY20F EV/OpFCF of 15.4x, a 15% premium over the ASEAN telco average of 13.5x, supported by attractive FY19-21F dividend yields of 5.8% p.a., based on Singtel’s commitment to pay DPS of 17.5 Scts p.a.
  • A potential re-rating catalyst is an earnings rebound in FY19-20F. Downside risks are more intense competition in Australia, India and Singapore and weaker regional associate currencies against the S$. Maintain ADD on SingTel Singtel, which is our Singapore telco preferred pick, with an unchanged SOP-based target price of S$3.40.

StarHub (SGX:CC3, Rating: HOLD, Target Price: S$2.00):

  • We recently downgraded StarHub from Add to HOLD on 5 Nov 2018 (see report: Starhub - Back To Waiting On The Sidelines), with an unchanged DCF-based target price of S$2.00 (WACC: 7.1%). StarHub's share price has risen 20% since mid-Aug 2018 and we think StarHub’s valuation now fairly reflects the potential S$210m savings over the next three years from its cost optimisation programme.
  • In terms of earnings outlook, we forecast core EPS to fall 23.6%/13.6%/29.5% in FY18/19/20F. While we project healthy fixed enterprise revenue growth over FY18-20F, the company may not be able to fully offset declining mobile revenues, as competition intensifies with TPG’s entry and its pay TV and broadband businesses deliver weaker earnings.
  • We forecast DPS of S$0.16 p.a. in FY18F but a lower S$0.10 p.a. in FY19-20F, which we believe is a more sustainable level given the declining earnings, upcoming 700/2100MHz spectrum payments and potential M&As.

M1 (SGX:B2F, Rating: HOLD, Target Price: S$2.06):

  • We recently downgraded our least preferred Singapore telco, M1, from Add to HOLD on 2 Nov 2018 (see report: M1 Limited - Take The 5 Cents Too!) as M1's share price has risen and is now close to our target price of S$2.06, based on Keppel-SPH’s Voluntary General Offer (VGO) price.
  • We believe the VGO is likely to be successful as we expect the IMDA to give its approval and KEPPEL CORPORATION LIMITED (SGX:BN4) and SINGAPORE PRESS HLDGS LTD (SGX:T39) only need a minimum acceptance of 17.23% (outside of SPH’s 13.45% stake) in order to meet the condition that Keppel-SPH holds more than 50% of M1 at close of offer. Keppel-SPH stated that there is no intention to preserve M1’s listed status if the free float requirement is not met after the VGO. Unless it is able to find a partner that is willing to fund most of the counter-bid, we think Axiata is likely to accept the VGO offer to avoid overstretching its balance sheet. Axiata would prefer to redeploy capital in its core markets/businesses, rather than have it stuck in Singapore (a non-core market), in our view.
  • Upside risk: counter-bid from Axiata at a higher price. Downside risk: IMDA rejects the VGO.

FOONG Choong Chen CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-29
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