Singapore Telcos - CGS-CIMB Research 2020-12-10: Back Online In 2021F

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Singapore Telcos - Back Online In 2021F

  • Steady 2021F mobile revenue with less drag from lower excess data usage, and ARPU support from 5G service. TPG’s subscribers traction may stay modest.
  • We expect demand recovery from the private sector and 30% jump in the government’s FY21 ICT spend to drive healthy enterprise revenue growth.
  • Stay sector Overweight, with SingTel (SGX:Z74) (ADD, Target price: S$3.10) as our top pick.

A more stable year for mobile in 2021F

Steady industry mobile service revenue y-o-y

  • We see steady industry mobile service revenue in 2021F after the steep decline of 25% y-o-y in 2020F (hit by COVID-19). We assume roaming/prepaid SIM sales will only recover gradually in Jul-Dec 2021F (as we expect international travel to slowly resume after COVID-19 fears abate), with a potential full recovery driving 8% growth in mobile service revenue in 2022F.
  • We believe
    1. SIM-only offers in the market may stabilise,
    2. the re-contracting cycle to revised device bundled plans would be largely done between end- 2020F and mid-2021F, and
    3. 5G bundles may provide some average revenue per user (ARPU) support, and hence we project a mild 3% postpaid ARPU dilution in 2021F (2020F: -26%), and 4% growth in 2022F.

SIM-only offers may stabilise

  • The SIM-only market has been highly competitive in the past two years, with various mobile virtual network operators (MVNOs) and TPG Singapore (whose holding company is Tuas [TUA AU]) entering the market. The market saw attractive offers (bigger quotas, price discounts) launched by various players in 1H20 and there were still some enhancements (albeit not as significant) in the past 3-6 months, based on our checks of telcos’ offers on their websites. Without considering network quality, we believe the best SIM-only offer in the market currently is by TPG at S$10/month for 50GB, followed by M1’s and giga’s at S$20/month for 40GB (valid for new sign-ups only).
  • While we do not expect an improvement in competition, we think SIM-only offers (c.15-25% of postpaid subs, according to our channel checks) may stabilise in 2021F because:
    1. data quotas are already very generous for entry-level plans currently being offered in the market relative to data usage levels (3QCY20 mobile data usage per sub per month: StarHub – 11GB, SingTel – 6GB). We also think the incumbents’ subscription fee of S$20-25/month is fairly low such that subs would be less inclined to undergo the hassle of shifting around networks to get the best deals, and more inclined to consider other factors such as network quality/coverage and full customer service/support.
    2. incumbents may feel less pressured given TPG’s modest subs traction thus far. Five months after its commercial service launch on 31 Mar 2020, TPG reported it had 133k paid subs (or 1.6% market share) as at early-Sep 2020. This represents approximately 1/3 conversion of its more than 400k free trial subs (based on company filings; if we assume no new subs signed up during this period), which is largely in line with our expectations.
    3. TPG’s track record thus far suggests that it may continue to see modest subs traction and compete mainly in the secondary SIM market (for second devices, back-up, elderly/kids) in 2021F, as its network quality and coverage have remained inferior to the Big 3 telcos (SingTel, StarHub and M1) since its Mar 2020 launch. At present, TPG’s outdoor coverage has already met the Infocomm Media Development Authority’s (IMDA) quality of service (QoS) standards, though its coverage and data drop rate are still slightly behind the Big 3’s, based on IMDA’s Quarterly Reports for Quality of Service for Apr-Jun 2020. It has also completed its road tunnels coverage and for Metro Rail Transit (MRT) line coverage, it now fully covers the North East Line and the Thomson-East Coast Line, based on Tuas’s 1HFY20 earnings presentation deck. However, in the same presentation Tuas said that it targets coverage extension to the remaining 3 MRT tunnels only be completed by 2H21 (in line with IMDA’s rollout obligation by end-2021).
  • Even then, we believe the incumbents’ indoor/basement coverage will continue to be better vs. TPG’s for some time to come, as it may take TPG time to optimise the indoor antenna systems in buildings for its 4G network. The gap in network quality will likely also widen in the next 12 months as the incumbents have started offering 5G non-standalone (NSA) services (based on their 2100MHz spectrum), while they are in the midst of rolling out 5G standalone (SA) networks (using the 3500MHz spectrum), whereas TPG will not be able to offer full-speed 5G services until it enters into a wholesale agreement with the incumbents. The latter is because TPG can offer super-fast 5G services on its millimetre-wave (mmWave) spectrum but its coverage would be extremely limited.
  • Moreover, based on our checks on TPG Singapore’s Facebook and Instagram social media pages, we observed that TPG has been facing some backlash from some subs due to the lack of customer service support, with the main complaint being the lengthy time required to resolve issues through email/messaging (TPG does not have a call hotline with live agents).
  • Anecdotally, we note that some of these issues involve data connectivity problems and billing (with some subs alleging that they continue to be charged even after terminating their lines). These issues were also reported by news portal Today Online on 27 Aug 2020, where TPG apologised to customers for the delays in its replies and committed to double its customer service staff to improve its customer experience, as well as set up a call hotline for its customers aged 60 and older.
  • While TPG’s teething issues may eventually be resolved, the negative perception may take a while to repair, and irate former subs may not return until there are strong reasons to do so. Moreover, we believe this incident may provide a clearer distinction between the incumbents’ traditional service model and TPG’s digital approach, which could lead to subs’ better understanding of the differences in network/customer services for the prices charged.

Subscribers’ re-contracting into revised device-bundled plans should be done by between end-2020F and mid-2021F

  • On the back of competitive pressure, StarHub launched its revised #hellochange postpaid plans in Dec 2018, followed by SingTel’s launch of its XO plans in Mar 2019 and M1’s launch of its One plan in May 2019. These plans were not only simpler in construct but were also much more generous in terms of data quota, resulting in a reduction of excess data usage revenue for telcos as subs progressively re-contracted into the plans upon the expiry of their previous 2- year device-bundled contracts. We believe the majority of subs would have made the transition by now, with the remaining transition to be done by end- CY20F to 1HCY21F; this implies that the ARPU drag from the decline in excess data usage should lessen in 2021F.
  • In addition, our competition tracker shows that device-bundled plans have been largely stable since mid-2019, in terms of price and data quotas. Device subsidies, after spiking in 1Q19 (coinciding with the heightened competitive intensity during the Big 3’s launch of their revised plans), have since normalised and stayed largely stable over the past 12-18 months, as per Figure 10.

Big 3 offering 5G services for extra S$5-10/month

  • The Big 3 telcos launched their respective 5G service offerings in Aug-Sep 2020, based on the NSA mode using the 2.1GHz spectrum (SingTel also uses 3.5GHz spectrum). StarHub in its 3Q20 earnings presentation deck reported that its 5G NSA population coverage was 70% as at end-Sep 2020. While SingTel and M1 have not disclosed their 5G coverage, a cursory glance at nPerf’s (network speed test platform) network test shows that the former’s 5G coverage is wider than StarHub’s, and the latter’s is roughly similar to StarHub’s. Meanwhile, SingTel and the StarHub-M1 joint venture company (JVCo) are in the midst of building their 5G SA networks, with commercial services expected to be launched around mid-2021F, according to the telcos.
  • In terms of pricing, SingTel is offering 5G as an add-on to its postpaid plans at a promotional price of S$10/month (usual price: S$15) for a 12-month term; the plan also comes with an extra 10GB (can be used on both the 4G/5G). For a 6- month term, M1 is offering its 5G Booster Pack at a promotional price of S$5- 12/month (usual price: S$15-40), which comes with additional 25-100GB. To encourage subs to take up its S$40 base plan (12GB) with a S$10/S$38 adu d-on (5GB/30GB), M1 is also offering free 3/6 months of its 5G Booster Pack (reverts to usual price afterwards). Meanwhile, StarHub launched its Mobile+ plans, which basically charges S$10/month extra for 5G speed, double the data quota and talktime, plus free 12 months of StarHub TV+ (worth S$9.90 for starter plan).

Enterprise growth to be boosted by higher government ICT spend

Enterprise revenue recovery for SingTel, and stronger growth for StarHub

  • We expect enterprise revenue for SingTel Singapore (64% of total FY22F SingTel Singapore revenue) to recover 4% y-o-y in FY22F (FY21F: -4%), and for StarHub’s (45% of FY21F total service revenue) to grow 16% y-o-y in FY21F (FY20F: +11%), the latter partly due to Strateq’s full-year contribution (acquisition was completed on 30 Jul 2020).

Demand recovery from the private sector as GDP rebounds

  • We expect a recovery in demand for enterprise services from the private sector amid the expected rebound in Singapore’s GDP growth to 5.3% in 2021F (2020F: -5.7%), based on CGS-CIMB Research’s estimates. In 2020F, enterprise revenue was impacted by the delayed implementation of customer projects and deferral of less-essential/longer-term digital transformation projects. As it is, telcos are already seeing signs of recovery in Phase 2 of Singapore’s reopening of economy (19 Jun-Dec 2020) and expect further recovery as Singapore moves into Phase 3 (which we expect possibly by end-2020/early- 2021). StarHub’s reported enterprise revenue grew 13.5% q-o-q in 3Q20 (2Q20: - 6.6% q-o-q), while SingTel’s group enterprise revenue rose 7.4% q-o-q in 2QFY21 (1QFY21: -11.7% q-o-q).

Government to boost ICT spend by 30% to the highest level on record

  • Based on a 8 Jun 2020 press release by the Singapore Government Technology Agency (GovTech), the Singapore government has raised its information & communications technology (ICT) spend by 30% to S$3.5bn for FY21 (including S$1bn in 2020-22 for cyber security), stating that the COVID-19 outbreak has illustrated the importance of digitalisation, and the need to accelerate digitalisation within the public and private sectors. This is the highest annual ICT spend by the Singapore government (on our records) and should provide a boost to both SingTel and StarHub; as we gathered from our channel checks, 20-30% of their 2020F enterprise revenue is from the public sector.

Financial outlook

Singtel has better core earnings growth in 2021F

  • We see SingTel’s core earnings rebounding 65% y-o-y in FY22F, driven by the turnaround at Singapore (recovery of mobile, enterprise and group digital life revenue after COVID-19), Telkomsel (whose parent company is TLKM [TLKM IJ]) due to more stable competition and Bharti Airtel (BHARTI IN) due to better monetisation and data usage growth).
  • For StarHub, while we see higher service revenue (+4.1% y-o-y), we project FY21F core EPS to fall 31% y-o-y on the back of the normalisation of several cost items. It benefited from various one-off cost benefits in FY20F, including Job Support Scheme credits, reversal of prior year provision for staff benefits, rental rebates (COVID-19 stimulus package), reversal of base station rental accruals, and refund from landlord for previous overbilling.

Would capex spike as telcos roll out 5G SA networks?

  • Based on its 2Q20 earnings presentation deck and conference call, StarHub guided for its initial investment for 5G rollout to be a reasonable c.S$200m over 5 years. This would include its 50% share of the StarHub-M1 joint venture company’s (JVCo) capex for radio and spectrum, as well as its own capex to build a 5G core network. During the call, StarHub also said that the capex will be 85%/15% funded by debt/equity and will be front-loaded. Hence, we assume 60% will be spent in 2H20F-2021F, with the remaining 40% in 2022-25F. Overall, we project StarHub’s capex at S$185m/S$219m in FY20F/21F (capex-to-sales: 9.1%/10.0%), easing off to S$185m (8.2%) in FY22F. This represents only a functional capex projection, as StarHub has not given the breakdown of the capex for the 5G core network that will sit in its books vs. the 5G radio access network (RAN) capex that will be spent at the JVCo level.
  • As reported in its 1HFY21 earnings management discussion and analysis, SingTel’s FY21F group capex guidance is S$2.2bn, of which S$700m is for Singapore (inclusive of 5G rollout). This is not a major change from its average capex of S$715m p.a. for Singapore in FY18-20. While SingTel has yet to provide any guidance for FY22F, we think that its mobile capex in Singapore will likely rise and hit a peak as it deploys its 5G SA network. Still, mobile capex is a relatively small part of SingTel’s overall capex in Singapore, coming in at only S$181m in FY20 (25% of total) and S$56m in 1HFY21 (18% of total). Therefore, even if its annual mobile capex in Singapore were to rise 50-100% (up S$91m-181m) from normal levels, that will not drive up SingTel’s group capex in FY22F too significantly from the S$2.2bn in FY21F, in our view.

FCF and net debt/EBITDA supportive of dividends

  • Based our projected group capex of S$2.2bn (including estimated S$80m for 2100MHz spectrum renewal), we forecast SingTel’s FCF/share to be at 12.4 cents in FY22F (FY21F: 11.7 cents). This should provide support for our FY22F dividend of 12.2 cents (75% payout), which offers an attractive dividend yield of 5.1%. We see SingTel’s net debt/group EBITDA easing to 1.7x by end-FY22F as its earnings recover, from a peak of 2.1x at end-FY21F.
  • For StarHub, we estimate its FCF/share will fall to 3.2 cents in FY21F (FY20F: 5.1 cents), after accounting for 2100MHz spectrum renewal fees (estimated at S$80m) and front-loaded 5G capex. While this is below our FY21F dividend of 3.8 cents (80% payout), we note that its net debt/EBITDA will still be within reasonable levels at 2.1x by end-FY21F (FY20F: 1.9x). Moreover, we estimate its FCF/share will jump to 12.7 cents while net debt/EBITDA ease to 1.6x in FY22F, when 5G capex starts to ease and there are no spectrum payments.

Asset monetisation may provide further support for SingTel’s FY22F dividend

Potential S$266m special dividends from Telkomsel

  • SingTel’s 35%-owned associate Telkomsel had announced the sale of 6,050 towers to its parent company TLKM for Rp10.3tr (S$950m) cash, to be completed by Mar 2021, according to TLKM’s 16 Oct 2020 bourse filing. TLKM has publicly said during its 3Q20 earnings conference call that it would not need to raise substantial cash for the tower purchase as Telkomsel will upstream the sale proceeds back to shareholders in the form of a special dividend. Hence, we estimate SingTel may receive S$266m from Telkomsel, after accounting for 20% withholding tax.

S$2bn to be raised from Optus tower sale?

  • SingTel has publicly said during an investor conference call that it has engaged advisors for a potential Optus tower sale. While still in the preparation stage, a tender for the sale may be called in the next few months, in our view. The Australian Financial Review news portal on 30 Mar 2020 reported that Optus’s towers may be worth at least A$2bn (S$2bn).
  • SingTel said potential proceeds may be used to fund 5G capex and the announced acquisition of amaysim (Australia’s largest MVNO) for A$250m, as well as pare down debt. Nevertheless, we think a small special dividend is also possible (4 cents, if we assume 30% of total proceeds are paid out).

Singapore telecom sector outlook and company ratings

Stay OVERWEIGHT; top sector pick: SingTel

  • We stay OVERWEIGHT on the Singapore telco sector.
  • After a 6-year bear cycle since Apr 2015 (StarHub: -71%, SingTel: -46%), we believe the earnings risk from more intense mobile competition due to TPG’s entry is priced-in. We expect the mobile segment to be more stable and enterprise revenues to grow stronger in 2021F, with the former to see some recovery in roaming/prepaid SIM sales gradually over Jul-Dec 2021F. A key downside risk for the sector is worse-than-expected competition, which may weigh on SingTel and StarHub’s mobile revenue performance going forward.
  • We prefer SingTel (SGX:Z74) (ADD, Target price: S$3.10) over StarHub, due to the former’s more attractive FY22F core earnings outlook and dividend yield. A key re-rating catalyst for SingTel is its core earnings recovery in FY22F (driven by an expected rebound in associate, Singapore and Optus profits), while a potential stabilisation in Singapore’s mobile competition may also help to improve the sentiment for the stock.
  • For StarHub (SGX:CC3) (ADD, Target price: S$1.60), its FY22F EV/OpFCF (full recovery year) is at a 23% discount to the ASEAN telco average, with better-than-guided cost cuts (leading to core earnings beating our and Bloomberg consensus forecasts) as a potential re-rating catalyst.
  • NetLink Trust (SGX:CJLU) (ADD, Target price: S$1.10) offers resilient and attractive 5.6% FY22F yield.
  • See reports:

FOONG Choong Chen CGS-CIMB Research | Sherman LAM Hsien Jin CGS-CIMB Research | https://www.cgs-cimb.com 2020-12-10
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