Singapore Telecom Sector - DBS Research 2019-04-24: Should NetLink Worry About SP Telecom?

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

Singapore Telecom Sector - Should NetLink Worry About SP Telecom?

• SP Telecom only competes in the non-residential segment which comprises ~7% of Netlink Trust’s business.
• In the non-residential segment, bulk of Netlink Trust’s customers are SMEs rather than big corporates; SP Telecom is likely to target big corporates.
• We continue to like Netlink Trust (SGX:CJLU) for its 6.1% yield and as key beneficiary of StarHub (SGX:CC3)’s accelerated migration to fibre in the near term.

What’s New

• According to media reports, SP Telecom, a joint venture company of ST Engineering (SGX:S63) and SP Group, is investing "hundreds of millions" of dollars over the next five years to build an alternative to the government-backed Next Generation Nationwide Broadband Network (NGNBN).
• SP Telecom said on Tuesday (April 23) its business-grade fibre broadband network services will be rolled out fully in the first three months of next year, with the Government and businesses here as target customers. See SP Telecom's media release.

Our View

• SP Telecom is a currently a relatively small player in the corporate segment and wants to be a significant player in the future. Our view is that SP Telecom’s initiative will have minimal impact on Netlink NBN Trust (SGX:CJLU) for two reasons:
  1. SP Telecom only competes in the corporate segment which comprise ~7% of Netlink’s business. Netlink Trust’s fibre network received S$750m funding from the Government, and the cost of its total network is north of S$2bn. Netlink Trust’s cost does not include the cost of electronic equipments and international connectivity as these costs are incurred by the telecom players who deploy Netlink Trust’s fibre. SP Telecom’s investment requirements are likely to be much higher including electronics and international connectivity costs. In addition, SP Telecom’s network might not be able to reach residential homes as that will require nationwide digging and installing another fibre termination point in homes will be even more cumbersome. We note that majority of the cost of Netlink Trust’s network is for the ducts and manholes that it owns and not for the fibre cable.
  2. SP Telecom’s business model is very different from Netlink’s model; Netlink is exposed to SMEs rather than big corporates. Netlink Trust provides the underlying dark fibre to retail telcos who acquire end-corporate customers and provide various value-added services like cybersecurity and software solutions. On the other hand, SP Telecom goes direct to the end customers and competes with the likes of Singtel and StarHub who do not use Netlink’s fibre.
• SP Telecom has been investing in fibre services for many years, but a lot of SME business has been going to smaller and nimbler telcos who use Netlink Trust’s dark-fibre which reaches far beyond the central business district and business parks. These smaller telcos might not use SP Telecom’s fibre (with limited reach) as they compete directly with SP Telecom.
• Netlink Trust’s market share in the corporate segment has been rising gradually and stands above 35% in terms of number of connections.
• We continue to like Netlink Trust with a near-term catalyst of benefitting from StarHub’s accelerated migration to fibre, and its 6.1% yield which is much higher than ~5.7% yield offered by large-cap industrial S-REITs even though Netlink Trust’s
  1. distributions are largely independent of the economic cycle,
  2. gearing is less than half of industrial S-REITs, and
  3. asset life is much longer than industrial S-REITs.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2019-04-24

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