Telecommunications - RHB Invest 2019-01-14: The Proof Is In The Network Pudding

Telecommunications Singapore - RHB Investment Research | SGinvestors.io SINGTEL (SGX:Z74) M1 LIMITED (SGX:B2F) STARHUB LTD (SGX:CC3)

Telecommunications - The Proof Is In The Network Pudding

Maintain NEUTRAL sector rating.

  • SINGTEL (SGX:Z74) remains our preferred exposure due to its earnings diversity and dividend certainty.
  • We expect competition to remain elevated on the recent trial launch by TPG Telecom (TPG). Sector valuation of 9x FY19F EV/EBITDA is -1.5SD from the 5-year historical mean of 10.4x, which we believe has priced in downside risks from the new entrant (TPG). The FTSE Straits Times Telecommunications Index (FSTTC) has also underperformed the STI by 8-16% over the past 12-15 months, with the telcos’ attractive prospective dividend yields of 4-6.5% providing some share price support.
  • With the takeover offer for M1 LIMITED (SGX:B2F) by major shareholders (KEPPEL CORPORATION LIMITED (SGX:BN4) and SINGAPORE PRESS HLDGS LTD (SGX:T39)) likely to become unconditional, we advise investors to accept the SGD2.06 per share offer.

TPG launches 12 months trial service with unlimited data.

  • TPG quashed earlier talks that it may abort its mobile rollout by launching a free 4G SIM-only data plan in Dec 2018, offering 12 months of unlimited data. The trial service (by registration) allows the fourth mobile entrant in the market to gather feedback from users and optimise its 4G network before commercial launch later in the year. Pre-registrations for its trial service has topped 50,000, with the telco making arrangements to support more users.
  • While the trial offer is expectedly aggressive, the proof of the pudding, in our view, is whether TPG’s network could match the vastly superior 4G networks of the incumbents, which ultimately defines end-user experience.
  • Recall that TPG reported SGD66.7m cash capex for its Singapore mobile rollout in FY18 (Jul) (including SGD4.4m in FY17) – significantly below the SGD200-300m guidance made in late 2016 for outdoor coverage. This has raised doubts as to its ability to meet the roll out conditions set by the Info-communications Media Development Authority (IMDA) ie 95% outdoor coverage (by end-2018), to be followed by road-tunnels/in-building coverage (end-2019) and underground MRT stations (end-2021).

Incumbents have hedged their bets well with aggressive re-contracting offers and a data-led/MVNO strategy.

  • The incumbent operators have introduced numerous data-upsized packages, re-contracted subs on new handset bundles and forged strong collaborations with mobile virtual network operators (MVNO) over the past 12 months to pre-empt fresh competition. We believe this has disrupted TPG’s go-to-market strategy, necessitating a review (partly explaining the delay).
  • As all three incumbents are utilising MVNOs to “hedge” against market share losses, TPG would have less room to manoeuvre and grab market share, in our view. There are five competing MVNOs in the market – two hosted by SINGTEL (SGX:Z74) (ZeroOne & Zero Mobile), one each on STARHUB LTD (SGX:CC3) (MyRepublic) and M1 LIMITED (SGX:B2F) (Circles.Life). We do not rule out more MVNOs entering the fray.

MSR should remain under pressure in 2019.

  • We expect the industry’s mobile service revenue (MSR) to remain under pressure from stronger take-up of SIM-only plans, extended weakness on usage/roaming revenues, and competition. While SIM-only plans are still small relative to the overall subscriber base, they are rising rapidly and would make up an estimated 10-15% of total subs by end-2019.
  • Higher data inclusions and upsized data plans would also lend further pressure on data yields and ARPUs.

TPG goes live

  • TPG launched its free trial service in Dec 2018, offering 12 months of unlimited data and calls on a SIM-only contract-free plan. The unlimited data is capped at 2GB per day on 4G (thereafter capped at 1Mbps), while unlimited calls are to local mobiles (TPG numbers only) with 20 min calls to fixed line and 20 SMS bundled as well.
  • The telco had initially limited the service trials to the first 20,000 registrations (www.tpgmobile.sg) at its launch, but later raised the number by another 30,000 due to overwhelming response. At the timing of writing, it has temporarily stopped accepting registrations but indicated it is making arrangements to support more users. Pre-registered subs can collect their SIM cards at specific locations communicated on its website.
  • In our view, the trial/introductory plans are aggressive and to be expected of a new entrant to garner traction. The service trials would allow TPG to gather feedback from users and optimise its network, which are key considerations to drive market share.
  • We note that TPG’s service is only available on 4G-ready (LTE 2300MHz/900MHz) handsets/devices within its coverage areas. Users not within its coverage areas or without compatible handsets will not be able to access the service. The telco does not have any coverage in tunnels, a requirement it is mandated to attain by year-end.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-01-14
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 3.220 SAME 3.220