Singapore Telcos - CGS-CIMB Research 2019-03-25: Watch From The Ringside

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SINGTEL (SGX:Z74) STARHUB LTD (SGX:CC3)

Singapore Telcos - Watch From The Ringside

TPG finally on the scene

• TPG launched its 12-month free mobile service trial in late-Dec 2018. Subscribers that sign up for its SIM-only plan get unlimited data with fair usage policy (FUP) of 60GB (speeds throttled to 1Mbps beyond that), 20 minutes of outgoing calls to fixed lines, 20 local SMS and unlimited local all-net mobile calls. The latter requires a VoLTE device compatible with TPG’s network and is only applicable for newly-allocated TPG numbers for now, with TPG promising to provide mobile number portability as soon as possible. International calls and roaming are currently not supported.
• TPG will contact registered subscribers two months before the end of the trial period to provide details on the monthly charges and invite them to renew their subscriptions. From local blogs, we gather that the response to TPG’s free trial has been strong, with long queues seen at SIM card collection centres. TPG had initially closed registration after the first 20k subscribers signed up, but reopened registration on a daily basis in late-Jan 2019, though it limits registrations to two SIM cards per national registration identity card (NRIC).
• On 12 Mar, TPG announced that it is expanding its service trial to 200,000 users.

Still early days for the TPG network

• According to TPG, it has achieved 99% island-wide outdoor coverage as of Mar 2019 and remains committed to enhancing its mobile network coverage to include tunnels and indoor areas. We gather from various network tests done by local online blogs/forums that TPG’s outdoor (above-ground) network speeds are mostly satisfactory, although they are not as fast as incumbents’.
• Its network coverage and mobile service (e.g. off-net calls to various operators) have seen improvements from week to week YTD. However, for now, TPG’s mobile service is still not available on the MRT, in tunnels or underground basements. Based on its licence rollout obligations, TPG’s network will include road tunnels and in-building coverage by 31 Dec 2019, and MRT underground stations/lines by 31 Dec 2021.

Possible commercial launch in 2H19F

• TPG is still currently in the network-testing stage, hence its free trial service. Apart from collecting network performance data, we believe the free trial service allows TPG to pick up potential subscribers, with the opportunity to convert them into paying customers upon the completion of the trial period.
• In our view, it is possible that TPG may commercially launch its service in mid-2019F (after six months of network testing) or at end-2019F, upon the completion of the free trial service for the initial subscribers that signed up in late-2018.

Incumbents are trying to snuff out the enemy

TPG’s SIM may be used as supplementary data

• When it does launch commercially, we believe it will be difficult for TPG to charge full prices as its network is unlikely to cover MRT underground stations and lines by end-2019, which are key service usage areas for subscribers. It is possible that TPG may charge half (or less) of its normal price in the first 12 months, to compensate subscribers for its inferior network coverage, in our opinion.
• For the same reason, TPG’s mobile service is likely to be used as a secondary SIM card (in phones that support dual-SIM or eSIMs) in the initial 2-3 years, or given by subscribers to their parents/children. While this means that subscribers may keep their existing primary lines, they could opt for smaller data quota plans and rely on the TPG SIM to supplement their data usage.

Incumbents offer free data and aggressively-priced data add-ons

• We believe the Big 3 incumbents (and other existing MVNOs) are aware of TPG’s potential value proposition as a secondary SIM (for supplementary data). After throwing in 10-15GB/month of free data (valid for 12 months) into packages in Dec 2018, incumbent telcos recently launched big data quota add-ons at attractive prices.
• In Jan 2019, Circles.Life (hosted by M1 Limited (SGX:B2F)) upped its S$28/month base plan quota from 6GB to 20GB. Then in mid-Feb 2019, it went on to revise its S$20/month Data Plus option to unlimited 20GB (FUP) data (speeds managed after FUP), from 20GB previously. Effectively, for S$50/month (S$28 for 20Gb base plan + S$20 for data add-on + S$2 for free incoming calls), subscribers get unlimited 40GB (FUP) data.
• StarHub (SGX:CC3) followed suit on 22 Feb, coming out with an unlimited 50GB (FUP) data add-on offer for S$20/month. This is more attractive than Circles.Life’s offer, as subscribers can get unlimited 63GB (FUP) data (3GB base + 10GB free + 50GB add-on + unlimited weekend data) for S$45/month (S$25 for base + S$20 for add-on). We think StarHub’s data add-on offer also goes up directly against TPG’s trial offer and roughly places a S$20 price ceiling for TPG (as a secondary SIM card) when it eventually launches commercially. StarHub also put out a S$10/month for 10GB data add-on offer.
• However, the most aggressive offer was M1’s 25GB/month for S$5, launched on 23 Feb 2019, which applies to existing and new mySIM subscribers. This replaces M1’s previous add-on offer of 5GB/month for S$5. Subscribers can now take-up M1’s mySIM 20 (12-month contract, no device) to enjoy 40GB (5GB base + 10GB free + 25GB add-on) for just S$25/month (S$20 for base + S$5 for add-on). Given current average data usage levels (4Q18: 5.8GB), we believe this would be sufficient for the majority of subscribers and would make it very difficult for TPG to appeal to M1’s customers as a secondary SIM card.
• In response to all the data add-on offers by its peers, at end-Feb 2019, SingTel (SGX:Z74) lowered the price of its unlimited data add-on option, Data X Infinity (FUP: 50GB, 1Mbps speed beyond FUP quota), by 25% to S$29.90 (usual price: S$39.90). The Data X Infinity option can be subscribed to as an add-on to Combo 3, 6 and 12 device-bundled plans. Effectively, SingTel’s Combo 3 subscribers can get an unlimited 53GB (FUP) plan (including voice and SMS) for S$98.80 (S$68.90 for base + S$29.90 for add-on). For SIM-only, SingTel’s entry level plan offers 20GB (5GB base + 15GB free) for S$20 on a 12-month contract. For the higher-end S$46.75/73.50 plans, subscribers get 40/55GB.
• In Mar 2019, SingTel also launched its new XO postpaid device-bundled plans, starting from S$48 for 10GB (5GB base + 5GB free) to S$108 for a whopping 70GB (50GB base + 20GB free) of data. These plans are tailored for subscribers that want more data (less talktime) and are now competitive vs. offers from StarHub (the #hellochange plans introduced in Dec 2018) and M1 (mySIM Big Data plans).

Next 2-3 years likely to be tough for TPG

• We believe it will be very difficult for TPG to entice customers, even as a secondary SIM card, given the substantial amount of free data and aggressively priced data add-on offers by incumbents.
• If TPG decides to stay in the Singapore mobile market, it needs to be patient and offer its services at very low prices for the next 2-3 years, as a primary SIM to highly price-sensitive subscribers or as a secondary SIM to supplement subscribers’ existing data quota. Once it has built out proper network coverage by end-2021F (as per its license obligation), it could then compete more effectively in the primary SIM card segment, with more room to play with prices vs. incumbents’ primary offerings.

There is a price to pay for incumbents

• While the current free data and aggressively-priced data add-on promotions can be removed at any time, we believe the incumbents could keep them in the market over the next 1-2 years to make TPG’s offer unappealing and put it under pressure. While the incumbents are likely to successfully defend their subscribers base from TPG in the near term using this tactic, there will be a price to pay, in our view.
• SIM-only subscribers may downtrade to the lowest-priced plans once their existing 12- month contracts expire (or immediately, if not on contract), as these now offer more-than-sufficient data quotas to fulfill the needs of the majority of customers in the market. For example, an M1 subscriber on the S$40/month SIM-only plan previously (12-month contract) can now downtrade to the S$20/month plan, while maintaining a data quota of 15GB/month.
• For most operators, we understand the mid-range SIM-only plans, i.e. S$40-50/month have been the most popular. Therefore, downtrading to the S$20-25 SIM-only price plans may have negative impact of up to 50% on existing SIM-only subscribers’ ARPU. Among the Big Three incumbents, M1 has the biggest exposure to SIM-only at 31% of its subscribers base (including Circles.Life) as of 4Q18. Meanwhile, we believe SIM-only forms a much lower (high-single-digits to mid-teen percentage) of SingTel’s and StarHub’s subscribers base.
• For device-bundled postpaid plans, we note that the Big 3 telcos have upped the amount of handset subsidies substantially to defend their subscribers base and lock in customers for the next two years. For the iPhone XR (64GB), subsidies have risen by 54-69% for the S$70-79/month plans vs. comparably-priced plans in Jun 2018 (iPhone 8, 64GB).

Outlook for 2019

Industry mobile service revenue to fall by a steeper 9.2% y-o-y

• We forecast industry mobile service revenue to decline by a steeper 9.2% y-o-y in 2019F (FY18: -5.5%), as incumbents adjust pricing/launch aggressive data promos to defend their subscribers base in anticipation of TPG’s expected commercial launch in 2H19. We do not expect incumbents to lose many subscribers to TPG but we project their postpaid ARPU to fall by an average of 9.3% y-o-y in 2019F (2018: -6.6%).
• The fall in industry mobile revenue in 2019F will be partly cushioned by continued robust revenue growth in the Fixed Enterprise business for M1 (+11.6% y-o-y) and StarHub (+5.1% y-o-y). Consequently, we estimate M1/StarHub’s total service revenue to drop by a milder 4.3%/3.7% y-o-y in FY19F.
• For SingTel, we forecast its Singapore service revenue to grow 0.5% y-o-y in FY3/20F, as the decline in mobile revenue is offset by growth in managed services and digital business revenues. However, on the back of slightly-weaker Optus revenue and A$ vs. S$, SingTel’s total group revenue could decline by 1.5% y-o-y in FY3/20F, based on our forecasts.

M1’s EBITDA to fall the most in 2019F

• Due to weaker revenues, we project M1’s EBITDA (pre-SFRS 16 adoption) to fall by 18.6% y-o-y in FY19F, while StarHub’s EBITDA drops by a lesser 13.9% y-o-y, buffered by progressive cost savings from its operational efficiency programme (the company targets gross cumulative savings of S$210m over FY19-21F).
• For SingTel, we forecast its Singapore EBITDA to ease 5.2% y-o-y but group EBITDA to largely stabilise in FY3/20F (FY3/19F: -15.8%) as associate earnings recover (+5.3% y-o-y).

Capex may ease slightly; 700MHz spectrum payments unlikely in 2019F

• We project industry capex (ex-spectrum) to ease 1.9% y-o-y to S$1.16tr in 2019F. We do not expect players to spend heavily, given already-high 4G coverage/speeds, while 5G network rollout is only expected to begin in 2020F and in a gradual manner. There is an outstanding amount of S$846m (SingTel: S$376m, StarHub: S$282m, M1: S$188m) to be paid to the government for the 700MHz spectrum that was allocated during the general spectrum auction in Apr 2017.
• However, we gather from industry players that the commencement of the spectrum usage may be delayed to 2021F (neighbouring countries have yet to complete analogue switch off), with payments likely to be made only in 2020F (six months prior to spectrum usage).
• Overall, we forecast industry operating free cash flow (OpFCF = EBITDA – capex) further contracting by 12.3% in 2019F (FY18: -16.1%), with M1’s declining the most (-23.9%), followed by StarHub (-19.7%) and SingTel Singapore (-8.7%).

Lower FY19F DPS at StarHub; steady at SingTel

• StarHub has cut its DPS from S$0.16 in FY18 to S$0.09 in FY19, with a payout ratio of at least 80% going forward. For SingTel, despite a possible 3.3% decline in core net profit in FY3/20F (based on our estimates), management has committed to pay a DPS of S$0.175 p.a. in FY3/19-20F.

Sensitivity Analysis

• Currently, the incumbents have turned aggressive to defend their existing subscribers base. If this is sustained or escalates, postpaid ARPU may decline by a bigger quantum than we have estimated. However, there is also a possibility that TPG’s commercial launch offers would not be as aggressive as feared and the incumbents pull back their free data and add-on offers to a certain extent in 2H19F. Figure 70 in attached PDF report shows the impact on our core EPS and fair value for the respective telcos, based on various scenarios for ARPU erosion.

Sector overview and Company Ratings

Maintain Neutral on Singapore telcos

• We foresee negative revenue and earnings outlook for the industry in 2019F (until 2020F, at least), with intensifying mobile market competition. Market consolidation is a possibility in the medium term (in 3-5 years) and if this materialises, we think it would be positive for the share prices of incumbents.
• Overall, we maintain our Neutral rating on the Singapore telco sector as share prices have seen substantial de-rating since 2015.
• Upside risks are earlier-than-expected market consolidation, further announcements on sizeable cost savings from restructuring programmes and smaller-than-feared impact from TPG.
• Downside risks are worse-than-expected competition and higher-than-expected spectrum prices for 2100MHz and 3.5GHz.

Our preferred Singapore telco is Singtel

SingTel (SGX:Z74, Rating: ADD, Target Price: S$3.30):

• After falling by 18.4% in FY3/19F, we forecast SingTel’s core EPS to ease by a further 3.2% y-o-y in FY3/20F, before recovering 4.4% in FY21F due to:
  1. stronger recovery in associate earnings – Bharti Airtel (BHARTI IN, Not Rated), Telkomsel (Unlisted),
  2. narrower losses by Digital Life (wholly-owned subsidiary), and
  3. rebound in Optus’s (wholly-owned subsidiary) earnings.
• Among the incumbents, we think that SingTel is still the most resilient to intense competition in the Singapore mobile market, as well as to any price shocks from the 2100MHz/3.5GHz spectrum auctions. SingTel’s FY20F EV/OpFCF of 15.3x is close to the ASEAN telco average of 15.5x, supported by attractive FY19-21F dividend yields of 5.9% p.a. (our estimates based on SingTel’s commitment to pay DPS of 17.5 Scts p.a.).
• A potential re-rating catalyst is earnings recovery from 2HFY20F onwards. Downside risks are more intense competition in Australia, India and Singapore and weaker regional associate currencies against the S$.
• Maintain ADD with a 3% lower SOP-based target price of S$3.30.
• See report: SingTel - Decent Yields To Ride Out Earnings Volatility.

StarHub (SGX:CC3, Rating: HOLD, Target Price: S$1.65)

• We forecast core EPS to fall 31.7%/37.5% in FY19/20F, before rising slightly by 1.7% in FY21F, including potential gross savings of S$210m over the next three years from its cost optimisation programme. While we project healthy fixed enterprise revenue growth over FY19-21F, 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, based on our estimates.
• We forecast DPS of 9 Scts in FY19F (as per StarHub’s guidance), before declining to 4.2 Scts in FY20F and 4.3 Scts in FY21F (based on an 80% payout ratio). StarHub’s FY19F EV/OpFCF of 13.3x is at a 14% discount to the ASEAN telco average of 15.5x.
• See report: StarHub - Not Time To Look Up At The Stars Yet.

FOONG Choong Chen CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-03-25

SGX Stock Analyst Report ADD MAINTAIN ADD 3.300 DOWN 3.400

HOLD MAINTAIN HOLD 1.650 DOWN 2.00