NETLINK NBN TRUST (SGX:CJLU)
SINGTEL (SGX:Z74)
STARHUB LTD (SGX:CC3)
Telecom Sector - Singapore Outlook
Mobile Sector
Mobile service revenue likely to shrink by a further ~6.5% in 2019.
- We project mobile service revenue in Singapore will shrink by a deeper 6.5% in 2019 compared to 5.3% decline in 2018. Our forecast factors in the on-going migration of postpaid subscribers from handset-bundled plans to SIM-only plans, on-going price competition among incumbents on the SIM-only front, and projected commercial launch of services by TPG by 2Q19.
Mobile sector to witness another year of sharp service revenue decline in FY19F
- Migration to SIM-only plans -3.2%
- Price war on the SIM-only front -2.7%
- Entry of TPG - MVNOs -0.7%
- 2019 Mobile sector decline -6.5%
TPG trials continue; commercial launch likely towards end of 2019.
- TPG launched mobile trials in late December 2018, offering unlimited data plans free for 12 months to the first 20,000 subscribers, expanding to 200,000 subscribers. Subscribers are eligible for 2GB of mobile data at 4G speeds daily with any excess usage capped at 1Mbps.
- Feedback from TPG users reveal decent 4G speeds outdoors but weak coverage in underground tunnels and within buildings. Online user reviews also indicate that TPG has managed to secure interconnection deals with all three operators, allowing users to make calls over 4G-VoLTE (Voice over LTE) and use SMS services with other operators.
- TPG also confirmed that it has achieved 99% island-wide outdoor coverage since 12 March 2019. We believe this could be an indication of TPG having ramped up its capex significantly over the past few months. TPG is required to meet 99% coverage in road tunnels and 85% coverage in buildings by 1 January 2020, which is quite a task given the weak in-building and tunnel coverage of its existing network that would require significant expansion. TPG is expected to launch commercial services in late 2019.
Incumbents have responded aggressively to kill the business case for TPG but hurting themselves heavily in the process.
- STARHUB (SGX:CC3) revamped its SIM-only offerings in early December 2018, cutting down the number of plans and bumping up data allowance on m gh-end SIM-only plans. StarHub also introduced a range of add-on data offerings such as 10GB extra data quota for S$10/month, unlimited data over weekends for S$6/month and unlimited monthly access passes to social media apps. SINGTEL (SGX:Z74) and other operators countered StarHub’s plans by offering additional data quotas for limited time iods as promotions.
- StarHub recently launched a data add-on, offering subscribers 50GB of data for an additional S$20 a month. For a limited time, the add-on was offered free of charge to SIM-only subscribers willing to enter into a two-year contract. This was on-top of free unlimited data during weekends and a promotional offering of 10GB of data per month.
- SingTel responded to StarHub’s latest SIM-only offerings with “Gomo” plans, which offers 20GB of data for S$20per month - the cheapest SIM-only plan among incumbents and second only to Circles.Life’s SIM-only plan of 20GB for S$18.
- Other incumbent operators have also responded to StarHub’s revamped offerings with the introduction of unlimited data over weekends and 25GB data add-ons for just S$5 per month. We believe incumbents would increasingly focus on SIM-only plans going forward amid lengthening smartphone replacement cycles, and that SIM-only subscribers form an estimated 15-16% of the postpaid user base. A price war by incumbents on the SIM-only front is likely to heavily impact TPG. TPG may face an even tougher time to gain sufficient revenue market share to reach breakeven EBITDA in light of the new SIM-only offerings of incumbents.
2020 likely to witness steeper declines.
- We project a steeper ~7.6% decline in mobile service revenue in 2020 as a result of disruption caused by a stronger TPG. Unless TPG is unable to meet the set guidelines for in-building and tunnel coverage by the beginning of January 2020, we believe TPG’s network would be formidable enough to be a threat to incumbent operators in 2020.
Potential industry consolidation and/or launch of 5G services during 2021 to arrest decline.
- The business case for TPG remains challenging with incumbents aggressively revamping their offerings in the SIM-only segment. Continued steep declines in the industry’s topline and lack of clarity on the path towards positive EBITDA for TPG could prompt the telco to consider consolidation with other players, helping the industry to recover.
- The launch of 5G services in 2021, primarily targeting enterprises, could also enable operators to stem declines in mobile revenues through re-pricing of services and the introduction of new use cases, potentially paving the way for a recovery in the industry.
Pay-TV
Pay-TV revenue growth plunges deeper into negative territory but losses could narrow in the future.
- The loss of subscribers with the on-going migration to Over-The-Top (OTT) services has led to major woes in the Pay-TV segment, with revenue growth plunging deeper into negative territory in 2018. Over 170,000 subscribers have left Pay-TV services since January 2016 when Netflix entered the Singapore market, with ~75% coming from StarHub, the largest provider of Pay-TV services in Singapore.
- Pay-TV revenues are likely to decline further in 2019, with potential loss of subscribers from the on-going migration of StarHub’s customers to fibre network, which could push users to exit Pay-TV services. We believe subscriber losses in the Pay-TV segment should stabilise during 2020, with a potential shift in the Pay-TV business models of SingTel and StarHub in favour of a more variable content model. Pay TV losses could still narrow from reduction in content costs with the renegotiation of contracts to a variable cost base versus fixed cost base currently.
Enterprise services
Singapore enterprise segment is particularly challenging for Singtel.
- SingTel’s Enterprise segment in Singapore, which contributes 60% of Singapore operations, has been facing headwinds from the accelerating pace of decline in legacy services and a recent slow-down in the Information and Communications Technology (ICT) segment. SingTel’s ICT revenue expanded by only 1% in CY2018 (Jan-Dec), vs. 4%/18% in 2017/2016.
- We believe the Singapore Enterprise segment would continue to remain under pressure in FY20 with slow growth in smart nation orders as the government undertakes a more cautious approach in expanding smart nation projects following the recent cyber-security breach.
- Pricing pressure from StarHub, which continues to expand its cyber-security portfolio aggressively, and continued decline of SingTel’s legacy carriage business, is unlikely to be adequately offset by growth in the ICT business
Lackluster Singapore EBITDA outlook for 2019.
- SingTel’s Singapore EBITDA is likely to dip 3-4% in FY20F, due to reasons described in the paragraph above.
- StarHub is likely to report declining earnings in FY19F, with higher cost of services and marketing expenses in 1H19 arising from the on-going migration of subscribers from cable to fibre, which would benefit NetLink NBN Trust (SGX:CJLU). StarHub is also likely to bear higher overheads in FY19F with the on-going expansion of cybersecurity and managed services segments, both of which tend to be labour and opex intensive businesses and carry lower margin profiles than traditional mobile and legacy IT services.
- We believe the net effect of cost savings announced by StarHub in 2018 would be minimal in FY19, as bulk of the cost savings would likely be reinvested in cybersecurity and other businesses. With the adoption of SFRS 16 in FY19, StarHub will capitalise some of its operating leases as right-of-use (ROU) assets, allowing for a reduction in opex while raising depreciation and amortisation expense.
Stock Picks
We like Singtel for earnings recovery in FY20F (Mar YE) from improving Australia and regional associates; stock offers 5.6% yield.
- SingTel has guided for the core EBITDA to be stable in FY20F (FYE March) with weakness in Singapore largely mitigated by a stronger Australia. Optus Australia is benefitting from its 4G network expansion in regional Australia that has been taking place in the last 4-years and will also gain from higher National Broadband Network (NBN) migration fees.
Another positive for Singtel’s earnings is the rise in profit contribution from its associates.
- This will be led by
- lower losses at Bharti post rights issue to lower its debt burden, and improving revenue in India, and
- higher contribution from Telkomsel as 2018 earnings was adversely impacted by SIM card registration exercise in Indonesia.
- Besides, SingTel offers 5.6% yield based on 17.5Scts dividend per year committed till FY20F, which we believe should sustain in FY21F based on 85% payout ratio.
We like Netlink NBN Trust (NLT) for 6% yield.
- NetLink Trust is trading at c.6.0% FY20F yield, versus an average yield of 5.7% offered by large-cap industrial S-REITs.
- We argue that NetLink Trust should trade at a lower yield than S-REITs as
- NetLink Trust’s distributions, due to the regulated nature of its business, are largely independent of the economic cycle;
- NetLink Trust’s gearing is less than half of S-REITs’ with an ample debt-headroom to fund future growth; and
- NetLink Trust’s asset life is much longer than S-REITs as NetLink Trust incurs annual capex to replenish its regulated asset base (RAB).
- Higher than expected FY20F capex funded via capex reserve and debt is a positive step to boost the regulated asset base which will be factored in the next review period from 2022 onwards.
In The Same Report:
Sachin MITTAL
DBS Group Research
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TOH Woo Kim
DBS Research
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https://www.dbsvickers.com/
2019-05-28
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Analyst Report
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