Singapore Telecom Sector - DBS Research 2019-10-18: Joint Bid For 5G Is The Key For Stocks

Singapore Telecom Sector - DBS Group Research | SGinvestors.io SINGTEL (SGX:Z74) STARHUB LTD (SGX:CC3) NETLINK NBN TRUST (SGX:CJLU)

Singapore Telecom Sector - Joint Bid For 5G Is The Key For Stocks

Updates on the deployment of 5G in Singapore

Info-communications Media Development Authority (IMDA) to allocate four 5G licences instead of two.

  • IMDA revised its previous proposal to allocate only two 5G licences, revealing plans to make up to four 5G licences available in Singapore. Accordingly, there will be two nationwide 5G networks, in line with IMDA’s original plan, along with two smaller 5G networks primarily targeting specific-use cases. The two nationwide licences would entail spectrum in the 3.5 GHz band along with spectrum in the 26 GHz and 28 GHz bands, while the two smaller networks would only be allocated spectrum in the millimetre wave (similar allocation to the nationwide 5G networks would be provided to the smaller 5G networks within the millimetre spectrum bands). Interested operators are required to provide their 5G proposals including their network design and rollout plans to the IMDA by January 2020.
  • Licences are expected to be granted by mid-2020 although the 3.5 GHz licences required for the launch of the nationwide networks are likely to be allocated only in 2021.

Two smaller 5G networks create a faster enterprise-centric roll-out.

  • We believe that the smaller localised 5G networks will ensure that operators start providing 5G services to enterprises for use cases like Smart Factories from mid-2020 onwards as the roll-out of the nationwide 5G network is likely to take till 2021.
  • The smaller 5G networks would benefit operators like TPG, which do not possess enough balance sheet strength to support a nationwide 5G roll-out.

M1 and StarHub likely to collaborate on the nationwide 5G network roll-out.

  • StarHub (SGX:CC3) has been keen on inking a network-sharing deal with M1 since 2017, which was delayed due to challenging operating conditions in the mobile market and change in the ownership structure of M1. The launch of 5G in 2020 in Singapore could be a potential catalyst for a network-sharing deal with another telecom operator for StarHub, in our view.
  • With only two nationwide 5G network licences up for grabs, we believe that StarHub, as the second biggest operator in terms of subscribers, is likely to be a contender for one of the two licences, most likely via a tie-up with another telecom to share the capex of the 5G network roll-out. However, we are not ruling out the possibility of SingTel (SGX:Z74) opting to partner with another telco for the roll-out either.

We look to China for evidence.

  • China Telecom and China Unicom, the second and third largest operators in China in terms of subscribers, revealed plans to tie-up on their 5G network roll-outs with significant cost savings expected over the years. China Telecom estimated 5G capex cost savings of RMB200bn (~S$39bn) for each operator over the long term. Accordingly, the operators will co-build a 5G access network and share their 5G spectrum assets while maintaining and operating core-backbone infrastructure individually (Multi-Operator Core Network sharing model). With rumours of a potential capex-sharing deal emerging in mid-August, China Telecom and China Unicom’s share prices rallied. The two counters have reported gains of ~5% and 17% since 14 August.
  • A co-bid among two telecom operators would likely operate in a similar manner in Singapore, in our view. We believe the announcement of a potential network-sharing deal by StarHub might rekindle an interest in the counter among investors in a similar fashion, factoring in the 5G capex savings StarHub is likely to accrue through a deal of this nature.

Key pointers on the deployment of 5G in Singapore

  • Singapore launched a public consultation on 5G framework in May 2019. In May 2019, the Info-communications Media Development Authority (IMDA) of Singapore released a consultation paper on 5G mobile services and networks, inviting views on various key areas. IMDA plans to allocate the 3.5 GHz (3400–3600 MHz) and the 26 GHz and 28 GHz bands for 5G in the initial tranche of spectrum allocation (The 3.5 GHz band, currently used for satellite, is expected to be available from 2021).
  • Five key takeaways from the consultation are:
    1. Deployment of 5G from 2020 based on standalone network architecture, soon after standards are finalised in March 2020.
    2. Sustainable competition with at least two nationwide 5G networks to encourage network sharing. Two more localised networks announced in October 2019.
    3. No spectrum auction (3.5 GHz paired with 26 GHz and 28 GHz) but allocation via call for proposal (CFP) open only to four existing mobile network operators (MNOs). Network Rollout and Performance plan (30% weightage), Network Design and Resilience (40%), Financial Capability (15%), and Offer Price (15%) to decide the winner.
    4. Over 50% coverage within 24 months of the commencement of the 3.5 GHz spectrum rights (most likely starting from 2021).
    5. Each standalone network operator must be willing to sell 5G wholesale services to other mobile service providers; specifically to any Mobile Network Operators (MNO) and Mobile Virtual Network Operators (MVNO), upon request.

Why is Singapore considering a SA route?

  • Singapore already has a strong 4G market, supported by low prices and amicable competition. Singapore also enjoys ~90% fibre penetration. Hence, the appeal of NSA deployments simply for higher speeds and FWA for Singapore is much lower. The SA 5G deployment is the only form that would allow Singapore to realise its ambition of developing a vibrant 5G ecosystem, nurturing a pool of talent surrounding 5G and leading innovations in the new 5G era.

What’s the process for allocating spectrum?

  • Spectrum would be allocated via Call for Proposal (CFP) instead of spectrum auction. Allocation would depend on the following criteria:
    • Network Rollout and Performance plan (30% weightage)
    • Network Design and Resilience (40%)
    • Financial Capability (15%)
    • Offer Price (15%)
  • Based on previous announcements, for the two nationwide networks 100 MHz of 3.5 GHz spectrum (50 MHz unrestricted and 50 MHz restricted) would be allocated to one player, while 50 MHz of unrestricted capacity would be made available to the other. The player with only 50 MHz of capacity would be able to deploy taller antennas to compensate for the lack of spectrum. The two localised millimetre wave licences would carry a similar allocation in the 26/28 GHz bands to the nationwide networks.

Can players purchasing capacity on wholesale enjoy the true benefits of 5G?

  • Users of the 5G networks on a wholesale basis would also be able accrue the benefits of 5G. While gaining full functionality of 5G, some features such as Network Slicing could be difficult and technically complex in a shared network environment, and trials are being conducted to see how this can be accommodated.

How does the roll-out of the 5G network stack against 4G roll-out?

  • Despite 5G roll-out starting from 2020 onwards, the consultation paper implies that only around 50% coverage will be possible by 2023 as the key 5G spectrum, 3.5 GHz, will be available for use only by 2021. The affected fixed satellite services (FSS) in this band will be migrated to the 3.7-4.2 GHz band. IMDA is also considering the following bands for future 5G deployments, estimated to be available from 2025 onwards: 700 MHz, 1427–1518 MHz, 2.1 GHz, 2.5 GHz and 4.5 GHz.
  • The 5G roll-out will be much more gradual compared with 4G. 4G network coverage requirement for TPG was nationwide outdoor coverage (not 50%) in just 12 months of spectrum rights commencement. The slower roll-out can be explained by a lack of decent revenue opportunity in the consumer space despite high 5G capex requirements. The focus for 5G would be on enterprise applications where lower-latency and large number of connections are important. For example, remote surgery and high-frequency trading for lower-latency, and Internet of Things for a large number of connections. We expect ~100% island-wide 5G coverage to take 7-8 years versus 4-5 years for 4G, alleviating most of the higher capex burden.
  • Gradual 5G roll-out implies similar or slightly higher annual capex as incurred for 4G and hence not a major cause of concern. We estimate that StarHub may have incurred ~S$500m 4G capex in total over 2013-18. Telcos may incur S$1.0-1.5bn in 5G capex but over a longer period of 10 years.

Stock Picks and Valuations

Netlink is our top pick in the sector.

  • NetLink Trust (SGX:CJLU) is trading at c.5.5% FY20F yield, versus an average yield of 5.0% offered by large-cap industrial S-REITs. We argue that Netlink should trade at a lower yield than S-REITs as its
    1. distributions, due to the regulated nature of its business, are largely independent of the economic cycle;
    2. gearing is less than half of S-REITs’ with an ample debt headroom to fund future growth; and
    3. 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 during the next review period from 2022 onwards.
  • See NetLink Trust share price; NetLink Trust dividend history.

Singtel’s outlook remains challenging, dividends unsustainable.

  • Regional associates’ profit contribution has been a critical factor driving Singtel’s share price, via changes in the holding company (Holdco) discount. After a 10% reduction in the value of SingTel (SGX:Z74)’s core business, Holdco discount hovers at ~14% (vs. 15% historical average) and may widen given
    1. lack of clarity on Bharti Airtel’s path to profitability, and
    2. meagre growth from Telkomsel, which is losing revenue share in Indonesia.
  • We estimate that SingTel may reduce its dividend per share to 13-15 Scts in FY21F unless it divests its digital business, or lets its credit rating slip one notch down. However, we expect earnings growth to resume in FY21F. Negatives are mostly priced in, in our view.
  • See Singtel’s share price; SingTel's dividend history.
  • See also recent report: SingTel - Excessively High Street Numbers, Unsustainable Dividends.

StarHub likely to remain range-bound until clarity on a sustained earnings recovery emerge.

  • StarHub (SGX:CC3)’s earnings over FY19F have been marred by the ongoing fibre migration exercise leading to cost escalations and subscriber exits from Pay-TV. We expect the street’s earnings forecast for FY19F to edge downwards post 3Q19 with further shrinkage of cable TV revenue and higher costs attached to the ongoing migration exercise continuing to weigh on earnings.
  • We project StarHub to record stable to marginal decline in earnings over FY20F supported by the absence of migration costs, lower Pay-TV content costs and ~S$15-20m savings in Depreciation on the Hybrid Fibre Coaxial cable operating lease agreement with SingTel that StarHub will terminate in 2020.
  • While the counter looks cheap, offering an attractive FY19F yield of 7%, we await better clarity of a sustained earnings recovery and on cost savings over FY20F. See StarHub share price; StarHub dividend history.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2019-10-18
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.120 SAME 3.120