Singapore Telecom Sector - DBS Research 2019-10-24: Wait Or Bargain Hunt?

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

Singapore Telecom Sector - Wait Or Bargain Hunt?

  • Potential joint bid for nationwide 5G licences in January 2020 could rekindle interest in StarHub (SGX:CC3); we prefer to wait for signs of earnings stabilisation.
  • Higher downside risk to SingTel (SGX:Z74)’s consensus earnings than StarHub’s; wait for the right time to accumulate both stocks.
  • NetLink Trust is our top pick; prefer StarHub to SingTel.

Submission of a joint bid for nationwide 5G licence may flicker a brief interest in StarHub.

  • With 5G capex expected to be 2-3x the 4G capex for similar coverage, smaller telcos are looking for partnerships to bear the burden of high 5G capex. Wholesale price of 5G services is also subject to commercial negotiation between operators and is not regulated. Hence, it makes sense for interested operators to jointly bid for nationwide 5G licences in January 2020. China Telecom and China Unicom have witnessed ~4%/14% upward movements in their share prices since mid-August, when rumours of a shared 5G network emerged.
  • See also report: Singapore Telecom Sector - Joint Bid For 5G Is The Key For Stocks.

Earnings downgrade cycle in 3Q19

Singapore mobile sector still on tepid waters following the announcement of a fourth telco.

  • Prospects of the entry of a fourth operator drove the Singapore mobile market into a multi-year decline, with the incumbents opening up their networks to allow the entry of Mobile Virtual Network Operators (MVNO) in a bid to muddy up the lower end of the market that the fourth player was going to target. As a result, the number of mobile service providers in the market ballooned to seven MVNOs and four Mobile Network Operators (MNOs) from just three service providers in 2016.
  • Naturally, competition intensified driven by data-centric offerings by the MVNOs (Circles.life, for example, offering 1GB of data free of any monthly fees to customers). Incumbents were forced to respond on the SIM-only front that was targeted by the MVNOs, with SingTel, for example, offering as much as 20GB for S$20.
  • Aggressive competitive dynamics, coupled with ongoing subscriber migration to SIM-only plans that offer much bigger data bundles at lower price points, have continued to weigh on the industry’s data yields, which we estimate dropped as much as 30% y-o-y over 2Q19, one of the steepest declines in the region. Mobile service revenues contracted 5.3%/6.6% over 2018/1H19, driven by intense competition and migration to SIM-only offerings.

Sector woes continue; earnings downgrade cycle may not end in 3Q19; we will review the counters in 2020.

  • We expect the street’s earnings expectations on StarHub and SingTel to edge down further post 3Q19 results. StarHub’s earnings revision would be led by further shrinkage of cable TV revenues and escalating migration costs; while weakness in core operations in Australia and Singapore and higher-than-expected losses at Bharti would result in lower earnings projections for SingTel.
  • We will review SingTel towards May 2020 with the end of Vodafone-Idea integration and once better clarity on stabilisation of Australia and Singapore emerge.
  • We expect to review StarHub towards 2H20 when signs of stabilisation in the Pay-TV segment emerge, coupled with better clarity on potential consolidation within the mobile sector.

Why is Singtel’s outlook still challenging?

1) Bharti’s recovery tied with the fortunes of Vodafone-Idea and potential ARPU uplift.

  • Without tariff revisions and the continued pressure on Bharti’s fixed segment from Jio, the path to profitability for Bharti is likely to be delayed. At present, Bharti’s losses are the biggest overhang on SingTel associates’ recovery. We expect Bharti to recover when Jio raises tariffs once it becomes difficult to win over subscribers from Vodafone-Idea.
  • Vodafone-Idea has faced challenges in its network integration process, including logistical and the removal of duplicate sites. The telco lost ~14m subscribers in the April-June quarter alone, with many customers citing poor service quality arising from the ongoing integration between the networks of the two merging telcos.
  • Vodafone-Idea has indicated that it is on track to meet its network integration target of June 2020 and as at the end of September, the telco had completed the network integration process in 11 out of 22 circles. We only expect a tariff revision once Vodafone-Idea’s network has been upgraded. At that point, Jio’s rampant subscriber additions will significantly slow down and the telco will prefer to raise prices instead of gaining more subscribers, benefitting Bharti in the process.
  • In October 2019, Jio withdrew its low-value prepaid packs priced at INR19 and INR52, making the INR98 plan the lowest tariff plan on offer to limit lower-value recharges that have been weighing heavily on ARPU. This follows Jio’s decision to charge INR0.06 per minute to recover the interconnect user charges (IUC). The INR98 tariff plan is valid for 28 days and offers 2GB of data with 100 SMS per day and unlimited voice calls. In comparison, Airtel’s 28- day plan starts at INR35 and outgoing calls are not allowed. Jio is following in the steps of Bharti and Vodafone-Idea to arrest the free-fall in ARPU. Along with the curtailment of the lower-end plans, Jio has also introduced four 'All-in-One' recharge plans for its subscribers priced from INR222-555. However, it remains to be seen if this will lead to an industry-wide ARPU uplift over the next 2-3 quarters.

2) Signs of stabilisation of Singapore and Austria operations is yet to emerge.

  • Singapore was the only regional market to record declines in revenue from data services vs. 5-15% growth in data revenue in the region. This coupled with low-double digit declines in revenues from legacy services continue to drag the mobile topline of Singapore operators to negative territory. We see further room for declines in data yields as operators continue to maintain an aggressive stance on the data front and the looming entry of TPG over 2H19, which may further exacerbate pricing declines in the low-end segment.
  • Optus adds to SingTel’s woes. While recent uplift in mobile pricing is expected to be positive for industry profitability over the medium term, new price plans will take time make an impact. In response to the release of Telstra’s new plans in June, Optus also increased its postpaid package pricing in August while Vodafone took measures to withdraw data inclusions from its lower-priced plans. However, weak economic outlook will continue to weigh on AUD (4% depreciation against SGD since April 2019) and Optus enterprise segment.

3) Tough choice for Singtel: trim dividends to defend its credit rating or exit from digital business to maintain its credit rating.

  • In March 2019, credit ratings agency, Moody’s Investors Service, revised SingTel’s credit ratings outlook from “Stable” to “Negative”, citing continued pressure on SingTel’s EBITDA and cash flows. The credit ratings agency stated that it may consider downgrading SingTel’s credit rating, should Net Debt-to-Adjusted EBITDA (Core EBITDA plus cash dividends from associates) remain elevated at over 2.0x or if SingTel’s core EBITDA margins continue to remain below 30%. We expect SingTel to likely report core-EBITDA margins below 30% over the next two years owing to pricing pressures in mobile markets in Singapore and Australia, and growing contribution of low-margin Information and Communications Technology (ICT) service businesses to SingTel’s enterprise segment. SingTel’s Net Debt-to-adjusted EBITDA as per our estimates would remain above 2x (considering operating leases as debt based on SFRS 16), should SingTel continue to maintain its dividends at current levels.
  • Alternatively, if SingTel exits from the digital business segment, the cut to dividends can be avoided. SingTel is currently on the lookout to monetise some of its loss-making digital business investments such as cyber-security business Trustwave, and digital marketing units Amobee and Videology. Trustwave reported widening losses before interest and tax of ~S$102m in FY19 while the digital life division (including Amobee and recently acquired Videology) posted pre-tax losses of S$42m, despite revenues growing by ~12% y-o-y in FY19. The sale of non-strategic assets such as Amobee will aid in SingTel’s earnings recovery and strengthen its financial position, reducing the need for a potential cut in dividends.
  • See report: SingTel - Excessively High Street Numbers, Unsustainable Dividends.
  • See also: SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.

Why is StarHub’s outlook still bleak?

Mobile revenues unlikely to stabilise till FY21.

  • We expect StarHub’s mobile revenues to contract by 6.7%/7.3% over FY19F/20F with heightened competition from incumbents and SIM-only migrations continuing at an accelerated pace over the near term. In our opinion, StarHub’s mobile segment is unlikely to see better days till FY21F. We expect StarHub’s mobile sector to post a lower decline over FY21F, driven by
    1. Potential merger of TPG with one of the incumbents or a complete exit from the Singapore market,
    2. Peaking of SIM- only subscribers leading to lower SIM-only migration,
    3. Potential launch of 5G-related service offerings.

Pay-TV woes amplified by ongoing fibre migration.

  • StarHub Pay TV revenues dipped 18% over 1H19 with steep subscriber losses and declines in ARPU. About 35,000 subscribers (~9% of StarHub’s 4Q18 Pay-TV subscriber base) withdrew from Pay- TV services over 1H19, largely driven by the ongoing fibre migration. According to the management, during the migration, a large portion of the customer base who were not using Pay-TV services on a frequent basis decided to cancel their Pay-TV subscriptions. Broadband revenues also recorded a decline of 1.2% over 1H19 despite subscriber additions, as StarHub continued to run promotions and discounted service offerings in a bid to attract existing subscribers to migrate to fibre and attract new subscribers to the fibre service.
  • We expect StarHub’s Pay-TV revenues to dip by 18%/13% over FY19/20F led by further declines in the subscriber base and ARPU.
  • See report: StarHub - Wait For Earnings To Stabilise.
  • See also StarHub Share Price; StarHub Target Price; StarHub Analyst Reports; StarHub Dividend History; StarHub Announcements; StarHub Latest News.

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 3.5GHz band along with spectrum in the 26GHz and 28GHz bands while the two smaller networks would only be allocated spectrum in the millimeter wave (similar allocation to the nationwide 5G networks would be provided to the smaller 5G networks within the millimeter 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 3.5GHz 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 and levels the playing field among operators.

  • We believe that the smaller localised 5G networks will ensure that operators start providing 5G services to enterprises for use in 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. Smaller operators would be able to piggy back on the nationwide 5G network, by purchasing capacity on a wholesale basis to further support their 5G offerings.

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

  • StarHub 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 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 cost savings of RMB200bn (~S$39bn) in 5G capex savings 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 ~4% and 14% since the 14th of 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 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 & 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 & 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 millimeter 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? Although 5G rollout will start 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 is 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 is important. For example, remote surgery, high frequency trading for lower-latency and Internet of Things for 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.
  • See also report:

Stock Picks and Valuations

Netlink is our top pick in the sector.

Singtel’s outlook remains challenging, dividends unsustainable.

StarHub’s share price is likely to remain range-bound until clarity on a sustained earnings recovery emerges.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2019-10-24
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