Telecommunication Sector 2020 Outlook & Strategy - DBS Research 2019-12-12: Growth Revival On Top Of Dividends

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NETLINK NBN TRUST (SGX:CJLU) SINGTEL (SGX:Z74) STARHUB LTD (SGX:CC3)

Telecommunication Sector 2020 Outlook & Strategy - Growth Revival On Top Of Dividends

• NetLink Trust to benefit from StarHub expanding use of NetLink Trust’s fibre for enterprise customers. We like NetLink Trust for its 5.4% yield versus an average of 4.8% offered by large-cap industrial S-REITs.
• Earlier-than-expected 15%-50% tariff hikes in India turn us positive on SingTel who offers annual earnings growth of 8% over FY19-21F and dividend yield of more than 5%.
• NetLink Trust (SGX:CJLU) is our top pick; prefer SingTel (SGX:Z74) to StarHub (SGX:CC3) for offering superior growth.

Outlook

The outlook for Singapore telecom players has improved due to three key surprises:

• On 2 December, all three leading telecom players in India announced 15%-50% tariff hikes, earlier and and steeper than our expectations. This is certainly good news for SingTel, as each 10% mobile tariff hike at Bharti would contribute an additional ~3% earnings to SingTel,
• Singapore’s fourth mobile player – TPG, paid ~S$9m to StarHub (possibly S$27m to all three telcos) in for acessing in-tunnel equipments, reflecting TPG’s struggle to fulfill its network rollout obligations. This further strengthens the case for a sooner-than-later consolidation in the telco sector,
• StarHub reduced its FY19F capex guidance to 8-9% of total revenue from 11-12%before as it limits investments in cable TV and broadband segments and will expand the usage of the Next Generation Nationwide Broadband Network (Next Gen NBN) to serve enterprise customers as well. This will benefit NetLink Trust who provides the fibre for Next Gen NBN for a monthly fee.
• See StarHub Share Price; StarHub Target Price; StarHub Analyst Reports; StarHub Dividend History; StarHub Announcements; StarHub Latest News.

StarHub and M1 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 changes in M1’s ownership structure.
• 5G license in 2020 presents an ideal opportunity for network-sharing. With only two nationwide 5G network licences up for grabs, StarHub, as the second biggest operator in terms of subscribers, is likely to bid for for one of the two licences in Jan 2020, via a tie-up with M1 to reduce 5G’s capex burden. However, we are not ruling out the possibility of SingTel opting to partner with another telco for the roll-out.

Singapore mobile sector still on tepid waters.

• The number of mobile service providers has ballooned to seven mobile virtual network opertors (MVNOs) and four Mobile Network Operators (MNOs) from just three service providers in 2016. TPG, the fourth MNO, is expected to do a commerical launch in 1Q20.
• Naturally, competition intensified driven by data-centric offerings by the MVNOs (e.g. Circles.life is offering 1GB of data free of any monthly fees to customers). SingTel for example offering as much as 20GB for S$20 on SIM-only plans. Consequently, mobile service revenues are likely to contract by ~6.5-7% in FY20F, driven by intense competition and migration to SIM-only offerings.

Risks

Mobile sector to contract by ~8% in FY19/20F if TPG disrupts.

• Singapore’s mobile sector is likely to contract by ~8% in FY19/20F, vs. our base-case expectation of 6.5- 7% if TPG increases its current capex spend thereby posing a threat to the incumbents.

Singapore Pay-TV business’ may suffer longer than expected.

• We believe that the Pay-TV sector’s outlook remains dim. Pay TV providers are trying to pay for content via revenue-sharing with content producers, moving away from fixed cost structure. This should allow Pay-TV providers to turn around their loss-making Pay-TV businesses, However, if more content providers stick to thei demand for fixed content cost, then Pay TV providers may suffer for longer than expected

Bharti may opt for a rights issue if Adjusted Gross Revenue (AGR) dues are to be paid within three months, requiring Singtel to chip in.

• Bharti has appealed to the Supreme Court to allow the telco and the government to agree on the quantum of AGR dues that need to be paid and the timeline for payments, to soften the financial blow. Meanwhile Bharti is looking to raise ~INR210bn (US$3bn) to pay the AGR dues, either via a rights issue (if due soon) or via debt-raising (if the timeline to pay AGR dues is extended).

Singtel continues to face significant emerging market and forex risks.

• Investments in telcos in several emerging markets such as India, Indonesia, Philippines and Thailand, expose SingTel to emerging market risks. With regional associates and Optus contributing ~57% and ~23% respectively to earnings, it faces significant forex risk.

Valuation & Stock Picks

Pick Netlink for a superior yield and growth.

• NetLink Trust is trading at ~5.4% FY20F yield, versus an average yield of 4.8% offered by large-cap industrial S-REITs. We argue that NetLink Trust should trade at a lower yield than S-REITs as the company’s
  1. distributions are largely independent of the economic cycle, due to the regulated nature of its business;
  2. gearing is less than half of S-REITs’ with 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).
• NetLink Trust offers FY19-21F EBITDA CAGR of 5.8% as it benefits from 100% migration to fibre and rising use of its network for enterprise customers by StarHub.
• See NetLink Trust Share Price; NetLink Trust Target Price; NetLink Trust Analyst Reports; NetLink Trust Dividend History; NetLink Trust Announcements; NetLink Trust Latest News.

Earlier-than-expected tariff hikes in India turn us positive on Singtel.

• On the back of tariff hikes in India from December 2019 onwards, we are confident of a sharp rise in regional associates’ profit contribution in FY21F, which has been the most critical factor in SingTel's share price performance historically. Despite weakness in Singapore and Australia, SingTel offers annual earnings growth of 8% over FY20F-22F, coupled with over 5% yield.
• See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2019-12-12

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