NETLINK NBN TRUST (SGX:CJLU)
STARHUB LTD (SGX:CC3)
SINGTEL (SGX:Z74)
Telecommunications – Singapore - TPG Differentiates And Disrupts With Unlimited Data Plan
- TPG Telecom launched its trial in Dec 18. Its SIM-only package offers generous data allowance of 2GB per day at 4G speed, after which speed is capped at 1Mbps. We expect TPG Telecom to be disruptive due to its no-frills pricing, supported by its lean cost structure. Incumbents would be forced into matching TPG’s mind-blowing pricing.
- Our preferred pick is NETLINK NBN TRUST (SGX:CJLU), followed by SINGTEL (SGX:Z74).
- We have downgraded STARHUB LTD (SGX:CC3) (Target: S$1.60) to SELL.
WHAT’S NEW
TPG launches mobile trial in Singapore.
- TPG Telecom (TPG) will offer one year of free mobile services for the first 20,000 customers who register to participate in their trial. Trial participants are provided with SIM-only packages with unlimited data and unlimited mobile-to-mobile calls. The first 2GB of data every day is offered at 4G speed, after which speed is capped at 1Mbps for the remainder of the day.
- The package also includes 20 local SMS and 20 mins of outgoing calls to local fixed lines. The trial will provide feedback for TPG to optimise its mobile network prior to its launch of full commercial service in 2Q19.
ACCC flagged preliminary concerns.
- The Australian Competition & Consumer Commission (ACCC) has expressed preliminary concerns about the proposed merger between TPG and Vodafone Hutchison Australia (VHA) in an announcement dated 13 Dec 18. It sees TPG as an independent and aggressive new competitor with its own mobile network. As such, removing TPG would likely result in a substantial lessening of competition. The ACCC believes that having just three major players instead of four would lead to higher prices and less innovative mobile plans.
- The ACCC has invited submissions from interested parties by 18 Jan 19. It will also examine in greater depth the impact of removing VHA as a competitor in the fixed broadband market. The ACCC will make its final decision on 28 Mar 19.
ACTION
TPG delayed but not derailed.
- TPG has commenced trial in Dec 18 as we previously anticipated. We expect TPG to launch full commercial service in 2Q19. Thus, competition would intensify by mid-19. We expect incumbents’ post-paid ARPU to decline 31% over the next three years (previous: 23%).
- We expect TPG to gain a market share of 8.7%.
TPG and VHA merger at risk.
- The merger between TPG and VHA is at risk of being blocked by the ACCC due to substantial lessening of competition in the mobile space:
TPG is a more formidable competitor.
- The spin-off of the Singapore mobile operation into a separate standalone company is unlikely to materialise. Parent company TPG is a more menacing competitor with strong balance sheet to wage a protracted battle, and thus poses a greater challenge for incumbent operators.
The mobile industry in Australia remains a four-player market.
- The consolidation of the mobile industry in Australia from four to three players is unlikely to materialise. Thus, Singtel will not benefit from a tone-down in competitive intensity down under.
TPG differentiates and disrupts with unlimited data plan.
- Unlimited data plans ensure that customers’ monthly outlays for mobile are fixed and customers do not have to worry about bill shock. Data speed of 1Mbps is insufficient for streaming of high definition videos. However, customers can still listen to music, browse the web and access social media with ease. TPG’s customers do not have to worry about paying excess data charges.
Downgrade to MARKET WEIGHT.
- We have downgraded the telecommunications sector from OVERWEIGHT to MARKET WEIGHT due to impending entry of TPG as the 4th mobile operator and the intensification of competitive pressure.
NetLink NBN Trust (BUY/S$0.765/Target: S$0.99)
- NETLINK NBN TRUST (SGX:CJLU) has dominant market share of 90% for residential and 35% for non-residential fibre connections, where growth is projected at a three-year CAGR of 6.2% and 8.5% respectively in FY18-21.
- TPG is a customer and relies on NetLink’s NBAP connections for backhaul transmission. TPG is expected to require NBAP connections for 3,000 base stations over the next three years.
- Our target price of S$0.99 is based on DCF (cost of equity: 6.5%, terminal growth: 1.8%).
Singtel (BUY/S$2.93/Target: S$3.58)
- SINGTEL (SGX:Z74) provides a defensive shelter due to its geographical diversification. Mobile business in Singapore accounts for only 7% of group revenue if we include its proportionate share of its associates’ revenue.
- 40%-owned Bharti Airtel has formed a Special Committee of Directors for Fund Raising on 20 Dec 18 to explore various options for fund-raising. The upcoming fund raising exercise is untimely due to the steep correction in the stock market.
- Our target price to S$3.58 is based on DCF (COE: 6.25% and terminal growth: 1.0% [previous: 1.5%]).
StarHub (Downgrade to SELL/S$1.75/Target: S$1.60)
- Execution has improved since Peter K took over the helm as CEO with effect from 9 Jul 18. Our channel checks suggest that customer service has improved.
- STARHUB LTD (SGX:CC3) will be deeply affected by the entry of TPG as the fourth mobile operator. Mobile accounted for 46.5% of its service revenue in 3Q18. We cut 2019/20/21 earnings by 6.4%/17.3%/29.9% as price competition is expected to be intense and prolonged.
- Our target price of S$1.60 is based on DCF (COE: 8.75% and terminal growth: 0% [previous: 1.0%]).
SECTOR CATALYSTS
- Collaborations on infrastructure sharing with participation from NetLink NBN Trust.
- Impending entry of TPG as the fourth mobile operator in 2Q19.
ASSUMPTION CHANGES
- We cut earnings for StarHub as detailed above.
RISKS
- Competition and pricing erosion worsen more than anticipated post entry of TPG.
Jonathan Koh CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2019-01-02
SGX Stock
Analyst Report
0.990
SAME
0.990
1.60
DOWN
2.300
3.58
DOWN
3.900
