Singapore Telcos - CGS-CIMB Research 2019-10-17: IMDA’s Decision On Singapore 5G Rollout

Singapore Telcos - CGS-CIMB Research | SGinvestors.io SINGTEL (SGX:Z74) STARHUB LTD (SGX:CC3)

Singapore Telcos - IMDA’s Decision On Singapore 5G Rollout

  • 5G spectrum package will be allocated to two existing MNOs at a reasonable base price of S$55m via a call for proposal (CFP).
  • Mobile Network Operators (MNOs) are unlikely to put in an overly-high spectrum offer price, but may over-commit on coverage rollouts, in our view.
  • NetLink Trust (SGX:CJLU)’s proposal to be the single wholesale network will not materialise.

IMDA to announce decision on 5G spectrum award by mid-2020

  • After two public consultations, the Infocomm Media Development Authority (IMDA) today issued its decision on policy for 5G mobile networks and services in Singapore. IMDA will allocate to two existing Mobile Network Operators (MNOs) each a package of 100MHz at 3.5GHz and 800MHz at 26/28GHz (mmWave), via a call for proposal (CFP). IMDA will also allocate another two blocks of 800MHz at 26/28GHz to existing MNOs that were not awarded the packages.
  • The base price is set at S$55m for 3.5GHz, with no premium imposed for the 26/28GHz due to excess supply. The licence duration has been lengthened to 15/16 years for 3.5GHz/mmWave (vs. 12-15 years in the original proposal). MNOs with 3.5GHz must achieve 50% outdoor coverage within two years, i.e. by end-2022, and preferably nationwide coverage by end-2025. Given deployment challenges, IMDA has not stipulated 5G coverage requirements for roads and MRT tunnels, nor Quality of Service (QoS) obligations for now.
  • MNOs can submit their proposals by 21 Jan 2020, with IMDA to announce its decision by mid-2020. IMDA has largely kept its evaluation criteria unchanged, i.e. Network Design and Resilience (40%); Network Rollout and Performance (30%); Spectrum Offer Price (15%); Financial Capability (15%); and Wholesale Services (mandatory).

Our views

  • IMDA has set a reasonable base price for 3.5GHz (and none for mmWave). As the spectrum offer price is given a relatively low evaluation weight, we believe the risk is small that an MNO will put in a high price to win one of the packages.
  • We think the coverage requirements are sensible, taking into consideration industry players’ feedback on the unclear 5G business case. Still, there is some risk that MNOs may over-commit in trying to win the package, leading to high capex.
  • It is possible that SingTel (SGX:Z74) and a StarHub (SGX:CC3)-M1 joint venture (JV) win the two packages, in our view. If the latter is formed, one of the existing MNOs will not have 5G spectrum in the initial phase. However, in our view, there should be no major repercussions for this MNO given the lack of 5G use cases in the near-to medium-term and mandatory wholesale arrangements will be offered by MNOs that win the package.
  • NetLink Trust (SGX:CJLU)’s proposal to be the single wholesale network for 5G will not materialise, as the IMDA states that the 5G spectrum will only be awarded to existing MNOs and any JV applying for the packages can only consist of existing MNOs.

Maintain NEUTRAL on the Singapore telco sector

  • We maintain our NEUTRAL rating on the Singapore telco sector as share prices have seen a substantial de-rating since 2015, factoring in the negative revenue and earnings outlook for the industry in 2019-21F from intensifying mobile market competition.
  • Key upside risk is smaller-than-feared impact from TPG.

Highlighted Companies

SingTel (SGX:Z74)

  • ADD, Target Price S$3.60. See SingTel share price; SingTel dividend history.
  • After falling by 21.4% in FY3/19, we forecast SingTel’s core EPS to ease by a further 13.3% y-o-y in FY3/20F, before recovering 15.6%/6.8% in FY21/22F due to:
    1. stronger recovery in associate earnings,
    2. narrower losses by Digital Life, and
    3. rebound in Optus’s earnings.

StarHub (SGX:CC3)

  • HOLD, Target Price S$1.65. See StarHub share price; StarHub dividend history.
  • 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.
  • We forecast DPS of 9 Scts in FY19F, before declining to 4.2 Scts in FY20F and 4.3 Scts in an 80% payout ratio).

FOONG Choong Chen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2019-10-17
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