SINGAPORE (Dec 16): DBS Group Research is keeping its “fully valued” calls on M1 and StarHub, with earnings for the two telcos forecast to decline by 38% and 25% respectively by 2020, compared to 2015 levels.
DBS lowered its target price for M1 to S$1.78, from S$1.97 previously. Meanwhile, the target price for StarHub was lowered to S$2.65, from S$2.80 previously.
In a report on Thursday, DBS analyst Sachin Mittal says that even in the worst-case scenario for newcomer TPG Telecom, where it only manages to secure 6% revenue share of the telco market, M1 and StarHub stocks offer “limited upside potential”.
TPG on Wednesday made a winning bid of S$105 million — three times higher than the minimum reserve price of S$35 million — to defeat MyRepublic in the race to become Singapore fourth mobile operator.
The Australian telecommunications company will be provisionally allocated 60 MHz of spectrum, comprising 20 MHz in the 900 MHz spectrum band and 40 MHz in the 2.3 GHz spectrum band, to provide International Mobile Telecommunications (IMT) and IMT-Advanced services such as 4G services.
“TPG with an annual EBITDA of A$770-775 million (S$819-S$824 million) and FY16 (July year-end) net debt-to-EBITDA at 1.6x, has enough room to raise over S$500 million to S$1 billion required to roll out a mobile network,” says Mittal. “We project TPG to secure 8.5% revenue share by 2022.”
Due to its higher exposure to mobile revenue and a more price-sensitive subscriber base, Mittal says M1 — the smallest of Singapore’s three incumbent telcos — will be most impacted by the entry of TPG.
Cellular revenue accounted for approximately 68% of M1’s 3Q16 revenue.
“As a result, we expect the revenue share of M1 to drop from 18% in 2015 to 14% by 2022,” Mittal says.
DBS projects that M1’s total revenues will contract by 19% by 2022 from 2015 levels, while earnings decline by 38% during the same timeframe.
StarHub is expected to fare better than M1, with less reliance on mobile revenue, which made up 51% of total revenue in 3Q16.
“StarHub has also introduced more fixed-mobile bundling offers to reduce the loss of revenue share to a new entrant,” Mittal says.
DBS expects StarHub’s revenue share to drop from 30% in 2015 to 27% by 2022.
As a result, StarHub’s group earnings are expected to drop by 25% by 2022, compared to the 2015 level.
As at 12.36pm, shares of M1 are trading 1 Singaporean cent higher at S$1.96, while shares of StarHub are trading 1 cent higher at S$2.82.