Singapore Telcos - OCBC Investment 2018-12-05: Stick To The Defensives

Singapore Telcos ~ OCBC Investment Research | SGinvestors.io M1 LIMITED (SGX:B2F) SINGTEL (SGX:Z74) STARHUB LTD (SGX:CC3) NETLINK NBN TRUST (SGX:CJLU)

Singapore Telcos - Stick To The Defensives

Challenges at every turn

Analyzing the sector three-ways

  • In the mobile space, we see an old story continuing to play out. Local post-paid ARPUs have witnessed broad declines for a while now, but we believe that it might be too pre-mature to call the bottom as yet. Apart from TPG Telecom entering the fray in 2019, greater traction for SIM-only plans/MVNO offerings could continue to soften ARPUs. Based on our estimates, M1 (SGX:B2F)’s proportion of postpaid subscribers on SIM-only plans rose from ~10% in 3Q17 to ~20% in 3Q18.
  • In the Pay-TV segment, we note that the current fixed cost model continues to be challenging for the incumbents, especially as over-the-top streaming services from providers like Netflix fight for customer share. We understand that StarHub (SGX:CC3) , for instance, is looking to negotiate a variable cost model moving forward. While this would make for longer-term sustainability, we believe that for content providers to accede to such an arrangement, an industry-wide effort would be required, something we do not see just yet.
  • Perhaps the bright spot remains in the enterprise segment. This sector holds relatively more promise, with StarHub and M1 gaining traction on the back of growing demand for managed services/ICT solutions. Still, the major caveat is that margins from such businesses are typically thinner. M1’s fixed services EBITDA margin is ~10%pts lower than that of the group’s (on service revenue). While Singtel (SGX:Z74) seems to have bucked the trend with ICT revenue dropping 5% y-o-y in 1HFY19, we note that this is largely due to large non-repeat contracts, as well as the Singapore government’s temporary pause on new ICT systems.

Ongoing corporate action

M1’s pre-conditional VGO

  • Recall back in late-Sep 2018, Keppel Corporation (SGX:BN4) and Singapore Press Holdings (SGX:T39), through their SPV, Konnectivity Pte. Ltd. (Offeror), announced a pre-conditional voluntary general offer (VGO) for M1, at a cash offer of S$2.06 per share. The pre-condition is premised on obtaining all necessary authorizations and approvals from IMDA. We believe that this offer price presents value to existing M1 shareholders, as it comes at a 26.3% premium to the closing price of S$1.63 (21 Sep 18; prior to the VGO announcement).
  • At this juncture, we still believe that all other options are still on the table, such as Axiata Group (28.68% stake in M1) mounting its own offer (potentially in concert with other parties), or the Offeror raising the offer price in an attempt to consummate the deal.
  • In our opinion, the positive sentiment from the above corporate action catalyzed a spurt in StarHub’s share price, as the company is seen by many to be a closer peer to M1 (vs. Singtel). We choose to remain somewhat cautious, as
    1. there does not appear to be any similar offer for StarHub in the near-term, and
    2. there is no indication of any fundamental change in the industry’s dynamics arising from the ongoing VGO.

TPG Telecom

Not long now

  • TPG Telecom’s Singapore unit (assuming IMDA approval) continues to be the wild card, which we believe would commence commercial operations in early-2019.
  • Based on TPG Telecom’s conference call in Sep 18, the network build in Singapore is now up to A$66.7m, including the A$4.4m incurred in 2017. While not a large sum (relative to capex of the incumbents), we think it would be remiss of the market to discount the effect of TPG Telecom’s Singapore unit on mobile ARPUs, which has already been under pressure for a while now.

Two answers to the TPG Telecom question

Prefer Singtel among the Three

  • Among the three telcos, we believe that Singtel’s geographical diversification should help provide some relief. Singapore constitutes 33% of Singtel’s 1HFY19 PBT/EI, while Singapore mobile service and equipment forms 9.1% of group operating revenue.
  • We also think it is instructive to look at yield projections. For the next FY, we estimate Singtel to trade at a yield of 5.7%, while that of StarHub to be 6.4%, resulting in a relatively narrow spread. We estimate M1 to trade at a yield of 4.9% in the next FY, though this could see downside risk should the VGO be successful, given that the Offeror has already highlighted that dividends could be affected on the back of intensifying competition as well as the allocation of resources required for transformation efforts.

Boring is the new sexy

  • While Singtel remains our preferred pick among the 3 telcos, we also believe investors should not ignore NetLink NBN Trust (SGX:CLJU).
  • In our opinion, the near-term growth path for NetLink NBN Trust across the residential/non-residential segments remains clear, while also well-leveraged to the Smart Nation initiatives being rolled out in Singapore. Crucially, we believe that NetLink NBN Trust’s business model is resilient and less susceptible to the vicissitudes of the financial markets, especially in the late stage of the cycle.

Singapore Research OCBC Investment Research | https://www.iocbc.com/ 2018-12-05
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