Singapore Telecom Sector - UOB Kay Hian 2021-07-28: IMDA Offers 2.1GHz Band For 5G In An Auction To All MNOs

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

Singapore Telecom Sector - IMDA Offers 2.1GHz Band For 5G In An Auction To All MNOs

• IMDA proposed to offer 2.1GHz spectrum band for 5G. All MNOs can bid at S$10-15m per 5MHz size. We believe:
  1. this is a complementary spectrum for the incumbent SingTel (SGX:Z74) and Antina (the StarHub-M1 JV); and
  2. there is little risk of TPG as the third 5G player.
• This is because TPG is handicapped by the absence of 3.5GHz spectrum and ARPU uplift might not ‘fit’ its customer value proposition. A feasible solution for TPG is to be a 5G retailer.
• Maintain OVERWEIGHT. Top picks: NetLink NBN Trust (SGX:CJLU) and SingTel (SGX:Z74).

WHAT’S NEW

• IMDA proposed to offer 2.1GHz spectrum band for 5G in Singapore. To support the next wave of 5G growth, the Infocomm Media Development Authority (IMDA) is seeking views from the public and industry on the potential use and allocation of the 2.1GHz spectrum band (which is good for wide-area coverage) for 5G in Singapore. The band is currently used for 3G services and will expire on Dec 2021. IMDA is proposing to use the 2.1GHz spectrum band to support the nationwide deployment of 5G Standalone (SA) networks.
• It is IMDA’s intention that the 2.1GHz spectrum be used:
  1. as complementary spectrum to existing 5G networks deployed – for example, for SingTel and Antina Pte. Ltd. (the M1- StarHub JV) 3.5GHz spectrum;
  2. to enhance coverage and capacity; and
  3. as a potential deployment of an additional nationwide 5G SA network – in this case, likely to be TPG.
• We note that this is an auction exercise open only to existing MNOs (i.e. SingTel, StarHub, M1 and TPG).
• Impact on the incumbent. Our assessment suggests:
  1. the additional spectrum will be complementary for the existing SingTel and Antina in providing a resilient 5G SA network in Singapore; and
  2. low risk of TPG operating as Singapore’s third 5G SA provider.
• For SingTel and Antina that won the 100MHz of 3.5Ghz spectrum for nationwide 5G in Singapore, the additional 2.1MHz spectrum band can be used to meet IMDA’s targets of rollout milestone and coverage.
• Reasonable auction price. IMDA proposes to set a fair value of S$10m-15m per 5MHz (paired) lot. We deem this a reasonable range in comparison to the nearest spectrum pricing of S$11.9m per 5MHz for 2.5GHz awarded back in 2017 to SingTel, StarHub and TPG.
• We opine TPG is better off as a retailer. One of the criteria of bidding for the 2.1GHz spectrum is that TPG must deploy a new 5G SA network using the 2.1Ghz band which meets at least 50% outdoor coverage within two years and nationwide (at least 95%) within five years. As such, we believe the risk of TPG as the third 5G SA provider is low. This is because TPG appears to be handicapped by smaller spectrum allocation vs the incumbents (in the absence of 3.5GHz band) and it may not ‘fit’ into TPG’s business cases of appealing to customers. In addition, a 5G spectrum holder will need to provide wholesale services to any requesting MNOs or mobile virtual network operators (MVNOs) under the IMDA framework. It may be more efficient for TPG to be an access seeker in this situation.

ACTION

• Maintain OVERWEIGHT on the sector given attractive sector valuation and earnings recovery beyond 1H21. The sector is trading at 1SD below its 5-year mean EV/EBITDA of 12.3x. We believe earnings recovery should be more certain, given the benign competitive landscape and relatively better control of the COVID-19 situation. We also believe the nationwide 5G rollout will help the incumbents sustain market share.
• Pronounced earnings uplift from the enterprise business may take a longer time to bear fruit as telcos continue to explore new business applications for 5G. Our top pick is undervalued SingTel and defensive NetLink Trust. SingTel will benefit from the reopening of economies in the region and positive newsflow on the stake sale of Optus tower, amongst others.

SingTel (SGX:Z74)

• We believe earnings weakness is largely priced in as SingTel trades close to 1 standard deviation below its 5-year mean EV/EBITDA. Key re-rating catalysts include:
  1. reopening of economies in 2H21;
  2. monetisation of 5G nationwide coverage;
  3. faster-than-expected recovery in Optus’ consumer and enterprise business; and
  4. market repair in Singapore.
• Our DCF-based target price implies 13.5x 2022F EV/EBITDA (5-year mean).

NetLink Trust (SGX:CJLU)

• NetLink NBN Trust (SGX:CJLU) offers good earnings visibility and a sustainable dividend yield of 5% for FY22-23. The stock is defensive amid external volatility with 80% of group revenue derived from a 7% regulated return for 2018-22. Key re-rating catalysts include:
  1. 5G densification – more job orders arising from telcos’ fibre network densification demand; and
  2. growth in demand for non-building address point connections with the rollout of 5G/Smart Nation initiatives.
• At our target price, the stock trades at 17x FY21F EV/EBITDA, +1SD above its three-year mean EV/EBITDA of 15.3x. We expect the stock to further outperform as investors seek shelter in high dividend yielding stocks amid external volatility.

ESSENTIALS

• Singtel and Antina on track to delivery 50% 5G coverage by end-22 and nationwide coverage by 2025. SingTel appears to have a headstart with the launch of 5G SA coverage back in 4Q20. As for Antina, we understand that the 5G SA roll out started with base station identification and installation. At this juncture, StarHub has achieved more than 70% of outdoor 5G NSA coverage. SingTel and Antina have appointed Ericsson and Nokia as their respective 5G core providers.
• Key risk to TPG as Singapore’s third 5G provider. Naturally, if TPG decides to roll out its own 5G SA network in Singapore, we expect to see heightened competition. This outcome may see continuous erosion of ARPU and ROIC for the incumbents. This will displace our expectation of a market repair for the Singapore market, as competition has been rather benign in the past seven months in Singapore. At this juncture, we see SingTel and StarHub reporting encouraging 5G plan take-ups. This helps to offset ARPU dilution from SIM-only plans.
• 5G outlook for Singapore. Stepping into the era of 5G, we expect the following trends:
  1. ARPU uplift for consumer packages (coming from gamers and premium customers) will partly offset intense data pricing in the market; and more importantly,
  2. establishment of new business applications for 5G will open up a new customer base for telcos ie machines/connection points (Internet of Things (IoT)).
• In addition, industry consolidation (including the tower asset sale) and joint co-location for 5G rollout will address dilution in ROICs.
• Singapore telcos echoed the view that 5G enterprise opportunities will be driven mainly by solutions and applications. By virtue of low latency and high reliability (for the 5G SA network) 5G is expected to land new user cases across sectors, like remote robotics, massive IoT deployment and so forth. In an independent research report, the potential annual revenue accretion from 5G is estimated at S$370m-510m (or 7-9% of current annual enterprise business revenue for SingTel and StarHub). However, monetisation of 5G use cases is expected to take place over time as the ecosystem is still nascent and not all use cases can be effectively addressed by telecom operators.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2021-07-28

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