Telecommunications – Singapore - UOB Kay Hian 2019-02-27: Focus On Data Monetisation Amid Challenging Operating Parameters

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SINGTEL (SGX:Z74) NETLINK NBN TRUST (SGX:CJLU) STARHUB LTD (SGX:CC3)

Telecommunications – Singapore - Focus On Data Monetisation Amid Challenging Operating Parameters

• 2018 service revenue contracted 5% y-o-y, given intense prepaid competition, lower voice revenue and a notable shift towards SIM-only post-paid plans. SingTel and StarHub command 50% and 26% of subscriber market share.
• We see sector earnings to decline 18% in 2019 (2018: -28% y-o-y) before stabilising in 2020.
• Maintain MARKET WEIGHT as dividend yield averages at 5.5%.

WHAT’S NEW

Service revenue fell 5% yoy in 2018.

• Mobile service revenue was affected by intense competition, lower IDD and lower voice revenue as well as higher mix of SIM-only plans (specifically for SINGTEL (SGX:Z74) and STARHUB LTD (SGX:CC3)). StarHub recorded high-single-digit y-o-y decline in service revenue, given higher provisions in 4Q18 for customer loyalty programme as management expects redemption rates to increase.

2018 mobile subscribers stood at 8.3b (flat y-o-y)

• , with post-paid net adds of 75,000 offset by pre-paid net loss of 39,000 subscribers. SingTel commands a leading 50% subscriber market share in Singapore while StarHub came in second at 26%.

Declining ARPU trends.

• Post-paid ARPU declined y-o-y for all operators as a result of competition and bundled data packages (structural shift towards SIM-only plans). Despite declining subscriber base, pre-paid ARPUs were relatively stable at S$10-19/month.

2018 sector EBITDA margin contracted 2ppt to 32%.

• This reflects higher customer acquisition cost, change in revenue mix (shift towards SIM-only plans, with no contractual lock-in) and higher marketing expense in the quarter.

ACTION

Maintain MARKET WEIGHT, seek shelter in Singtel and NetLink.

• In the absence of key re-rating catalyst for the sector, we take a cautious outlook given the entry of TPG as the fourth mobile operator and intensifying operating landscape. The sector trades at 18x 2019F PE and 17.5x 2020F PE.

NetLink NBN Trust (SGX:CJLU) Rating: BUY / Target Price: S$0.92

• NETLINK NBN TRUST (SGX:CJLU) has dominant market share of 90% for residential and 35% for non-residential fibre connections.
• TPG is a customer and relies on NetLink’s NBAP connections for backhaul transmission.
• NetLink continues to benefit from fibre acceleration programmes. We are encouraged by StarHub’s decision to migrate its residential broadband and pay-TV customers to an all-fibre network. It plans to cease provision of cable services after 30 Jun 19. In 3QFY19, NetLink’s residential fibre connections grew 10% y-o-y and 4% q-o-q to 1,283,800, which were higher than the projections provided in its IPO prospectus. Non-residential fibre connections grew 6% y-o-y to 45,700 although there is an overhang on weak business sentiment in the near term.
• Our target price of S$0.92 is based on DCF (cost of equity: 6.5%, terminal growth: 1.8%).

Singtel (SGX:Z74) Rating: BUY/ Target Price: S$3.58

• SingTel provides a defensive shelter due to its geographical diversification. Overseas operations account for 75% of SingTel’s EBITDA (including share of associate EBITDA).
• While 9MFY19 earnings continue to reflect challenging operating parameters in Australia, we note signs of market stabilisation in Bharti as Jio is gradually monetising its services albeit at much cheaper rates. We also expect Telkomsel to recover in 4QFY19.
• Our target price is S$3.58, based on DCF (COE: 6.25%, terminal growth: 1.0%).

StarHub (SGX:CC3) Rating: SELL − Under Review/ Target Price: S$1.60

• While we believe management is gradually improving customer service helmed by Peter K, we are cautious in terms of near-term outlook as we believe StarHub will be adversely impacted by the entry of TPG.
• In 4Q18, management prudently cut future dividend payout to 80% (2018: 128% of underlying net profit). The company intends to pay a quarterly cash dividend of 2.25 cents vs 4 cents in 2018.
• Pending management meeting, we are reviewing our SELL call on the stock following a sharp 12% share price correction in the past month.
• Our target price of S$1.60 is based on DCF (COE: 8.75% and terminal growth: 0%

SECTOR CATALYSTS

• Collaborations on infrastructure sharing with participation from NetLink NBN Trust.
• Impending entry of TPG as the fourth mobile operator in 2Q19.

RISKS

• Competition and pricing erosion worsen more than anticipated post entry of TPG.

Chong Lee Len UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-02-27

SGX Stock Analyst Report BUY MAINTAIN BUY 3.580 SAME 3.580

BUY MAINTAIN BUY 0.920 SAME 0.920

SELL MAINTAIN SELL 1.450 SAME 1.450