Telecom & Media Sector Outlook - Maybank Kim Eng 2019-04-17: Still Waiting For The Last Domino To Fall

SINGTEL (SGX:Z74) STARHUB LTD (SGX:CC3) NETLINK NBN TRUST (SGX:CJLU) MM2 ASIA LTD. (SGX:1B0)

Telecom & Media Sector Outlook - Still Waiting For The Last Domino To Fall

With M1 LIMITED (SGX:B2F)’s imminent de-listing (date TBD) the key question now is what are the implications for competition in the industry? In theory, a privately held M1 would have room to be more disruptive, and indeed post VGO M1 has matched STARHUB LTD (SGX:CC3)’s heavy weekend data allocation promotions. However, the initial indications from Konnectivity’s post VGO disclosure suggested a tilt towards internal business restructuring. (see also: Singapore Telcos - M1 De-listing ~ Chaos Or Repair?)
Despite the wireless industry de-rating, the overhang remains; we maintain our NEUTRAL sector view. StarHub provides the best value, while NETLINK NBN TRUST (SGX:CJLU) offers insulation from wireless segment uncertainty.

Konnectivity has broadly disclosed a “multi-year” and “multi-pronged” goal to enhance M1’s competitiveness partly from synergies within the group (see SPH's announcement or Keppel Corp's announcement dated 18-Mar-2019). We believe that initially this could involve a right sizing exercise similar to StarHub on the cost side.
Meanwhile, on the revenue side farming more enterprise contracts from the relationships with its two major shareholders could be unlocked. These potential developments would not escalate the current state of competition – a neutral/positive event.
On the flip side, based on indications from Singapore Press Holdings (SGX:T39) management the MVNO deal and relationship with Circles.Life will remain.

MVNO deals and promotions catalyzed the current data price war that has spread to MNO main brands. An exit by one or more could be the signal for industry repair but this does not appear to be forthcoming in the short-term.
Meanwhile, TPG has yet to launch on a commercial basis, and could thus represent further industry returns risk. Once everyone shows their hand the market’s view on the telco sector may finally see a reduction in uncertainty and fear.

The wireless telco companies have de-rated with M1’s share price performance salvaged by the VGO. We anticipate earnings declines over the next two years given continued revenue erosion from the wireless segment. We believe that the de-rating reflects a significant amount of risk but the catalysts for a sustainable re-rating will only come after TPG’s commercial launch is revealed and digested.
As we noted in our 5G prospects note, 5G could be a differentiator in the long-term but first the pain of capex will have to be realized.

We have BUYs on StarHub and NetLink NBN Trust but whose upsides reflect the risk appetite warranted for each. NetLink NBN Trust is subject to less earnings and dividend yield risk volatility as the de facto of residential fibre monopoly backbone is thus also isolated from the current wireless sector disruption.
Meanwhile, StarHub offers potentially higher upside than NetLink NBN Trust as we believe the market has yet to appreciate its cost and revenue restructuring efforts. However, it is subject to the sector overhang and to earnings risk if the competitive environment turns further south.