Singapore Telecom Sector - DBS Research 2020-01-15: Better Days Ahead For Incumbents

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

Singapore Telecom Sector - Better Days Ahead For Incumbents

Joint bid for nationwide 5G licence in Feb 2020.

  • In our view, StarHub (SGX:CC3)-M1 may bid jointly for a nationwide 5G licence in February 2020, SingTel (SGX:Z74) might go solo while TPG may not be part of the bid. Without a nationwide 5G licence, there may be increased pressure on TPG to seek an exit from Singapore as there will be 5G coverage across at least half of Singapore by the end of 2022. While TPG is likely to bid for one of the two localized 5G licences, the 26/28GHz spectrum available for localized 5G will be inadequate for a nationwide 5G rollout and will cater to certain enterprise use case only.
  • Nationwide 5G licences will come with both 3.5GHz spectrum and 26/28GHz spectrum. 3.5GHz spectrum is essential for nationwide coverage. Licences are expected to be granted by mid-2020 although the 3.5GHz licenses required for the launch of the nationwide networks are likely to be allocated only in 2021.

SingTel likely to monetize loss making digital businesses.

  • 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 would strengthen ST’s financial position, alleviating the need for a potential cut in dividends.

SingTel may divest its data centre business.

  • SingTel’s data centre business is valued at S$2.0bn. In terms of GLA, we estimate its portfolio stands over 1.5msf worldwide based on available data. Assuming 45% utilisation (generally ranges from 30- 50%) and mid-point psf (Hong Kong and Singapore: S$3,700 psf, Australia: S$2,400psf) established from peer comparison, we value its portfolio at S$2.0bn. Pure-play DC operators fetch an average EV/EBITDA valuation of ~20x while telcos fetch a valuation of ~7x, suggesting 60-70% undervaluation of DC assets held by telcos.
  • Pure-play DC operators tend to structure their business in the form of REITs, yielding tax efficiencies and higher distributions for its owners. This creates a natural premium due to higher cashflow transparency boosting the market value. As evident from US telcos, Verizon and Century Link divesting their data-centre businesses, telcos are better off divesting their data-centre business at much higher multiples than their core businesses.

TPG’s business case is too weak for the company to survive.

  • TPG claims to have 300K free subscribers already (~5% subscriber share) but we believe many of these subscribers might churn once TPG starts charging for the service in1H20. Our base case scenario assumes 200k subscribers paying S$15 per month, implying S$36m revenue (~1% revenue share) by 1H2021.
  • According to our estimates, TPG needs S$120m- 150m revenue (5-6% revenue share) to cover its costs. As of July 2019, TPG had spent A$147m (S$139m) in cumulative capex on its Singapore rollout, or c. 46-70% of its planned S$200-300m of capex. To put this in perspective, StarHub typically spends ~S$200m plus annually to expand and upgrade its network. We do not expect TPG to be a disruptive force at the commercial launch of its services.

Zero Mobile – the second oldest mobile virtual network operator (MVNO) discontinued operations in Dec 2019.

  • Virtual mobile telco Zero Mobile (also known as ZeroSG), which is headquartered in Australia, launched in Singapore back in December 2017. It leases mobile network from SingTel and was the second virtual mobile telco to launch here after Circles.Life. Fast forward two years later, Zero Mobile has stopped offering mobile services in Singapore. Last month, it emailed its users about the discontinuation its Zero Xs and Zero X plans, which offered unlimited data at S$49.95 and S$59.95 per month respectively. According to the company, several individuals abused the service by using more than 600GB in a single month before defaulting on their account.
  • There are ten players in the market including 6 MVNOs out of which only Circles.Life seems to be doing well. We think that a couple of MVNOs could face funding shortage in 2020 due to their unsustainable business model.

NETLINK is our top pick followed by SingTel and StarHub (in order of preference)

NETLINK offers much superior yield and growth with much lower risks.

SingTel likely to benefit from rise in associates market value and reduction in holding company discount below 10%.

We also like StarHub for its ~6% dividend yield and catalyst in place.

ASEAN Telecom Sector: 3 Reasons To ACCUMULATE

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2020-01-15
SGX Stock Analyst Report BUY MAINTAIN BUY 3.8 SAME 3.8