SINGAPORE (Aug 22): DBS Group Research has downgraded Starhub and M1 to a “hold” rating, with a target price of S$3.65 and S$2.85 respectively, as competition from a new entrant remains a possibility.

Starhub had, on Aug 18, launched four mobile-fixed broadband plans with data bundles starting from 12GB. DBS analyst Sachin Mittal noted that the average revenue per user from these new plans would be 10% lower than the telco’s typical plans.

“These plans seek to defend its data-hungry user segment, which is also the segment that MyRepublic intends to target,” writes Mittal in a note on Monday.

To recap, the reserve price of the spectrum is S$35 million, but the interested players need to show that they have the necessary funding for the network rollout in order to make a bid, which is in the ballpark of S$250 million for MyRepublic.

“Our checks indicate that MyRepublic is still keen to bid for the spectrum,” says Mittal. “Despite a weak business case for the new entrant, one cannot rule out cash-rich investors willing to establish a footprint in Singapore.”

That said, Mittal believes there are three areas which would affect the success of a new telco, including the lack of a domestic roaming agreement in Singapore, local telcos’ willingness to defend their subscriber bases at the cost of future profitability, and the launch of 5G in the next 4 to 5 years, which would require more capital expenditure.

Mittal has forecast an 8% earnings decline for Starhub and a 20% decline for M1 in the long term, and believes investors will be “better off” buying local telcos, when the new player is ruled out during the spectrum auctions in October, or “accumulating on weakness if new player enters”.

Shares in Starhub and M1 closed lower at S$3.75 and S$2.71 on Monday.