SINGAPORE (Dec 7): CIMB is rating Singapore’s telco sector a “neutral”, citing challenges posed by the fourth mobile player. But Singtel gets the only “add” call, given better medium-term earnings growth outlook compared to its peers and being the least impacted by the new player.
Analyst Foong Choong Chen notes that industry mobile revenue is expected to remain weak going into 2017, due to continued decline in voice roaming and IDD usage, higher subscription of SIM-only plans with lower monthly fees as well as upsized data offerings.
“We also believe that the Pay TV business in Singapore will continue to be under pressure from Over-the-top video platforms such as NetFlix, Viu, etc,” says Foong.
StarHub has seen its pay TV subscriber base gradually decline in the last three quarters, notes Foong. For the broadband business, Foong expects revenue to grow by the low single-digits as subscribers upgrade to fibre packages. This growth should taper off at the end of 2017, as most of the migration would have been completed and market competition remains intense, notes Foong.
The incumbents are likely further spend heavily to on subscriber acquisition and retention costs in 2017 to lock in subscribers for another two years before the new player enters the market, notes Foong. As the fourth mobile player’s license will become effective on April 1, 2017, it is likely that it will launch its service in early-2018 after building out its own network, leaving incumbents to lock in subscribers before the new player’s arrival.
“In terms of timeline, we could possibly see the impact of this in 2H17, especially coinciding with the launch of the iPhone 8 in Sept,” says Foong.
While the New Entrant Spectrum Auction does not have an official timeline, Foong believes it will take place before the end of 2016. Currently there is no clear front-runner, but from a balance sheet strength perspective, Foong believes that TPG could outbid MyRepublic.
“Should TPG emerge the winner, we believe it could result in more market worries for the incumbents as TPG is seen to be more disruptive, with a longer staying power to withstand aggressive competition given its stronger balance sheet,” he says.
As for the General Spectrum Auction (GSA) in 1Q17, Foong believes that the risk of prices spiraling out of control is manageable. TPG has stated that it will join the GSA to bid for an additional 15 MHz of spectrum.
“IDA has set various spectrum caps to prevent hoarding and frivolous bidding in the GSA,” says Foong.
“While intense bidding cannot be ruled out, we believe this risk is manageable as there is a rather sizable 2 x 45 MHz of 700 MHz spectrum available, while the 2.5GHz spectrum may not be that hotly sought after given its shorter propagation properties,” says Foong.
Singtel does have silver lining in 2017, as it plans to spin off NetLink Trust via IPO by 2Q/3Q17, in line with its undertaking to IDA to divest its stake to less than 25% by April 22, 2018. Foong notes that media reports have highlighted Singtel’s appointment of three bankers to manage the IPO. The sale of the 80% stake could raise S$2 billion to S$2.8 billion cash, based on a projected valuation of S$2.5 billion to S$3.5 billion of NetLink Trust.
“On the back of this, we think it is likely for Singtel to declare a special dividend, possibly in its 4QFY18 results announcement,” says Foong.
Singtel remains the preferred telco pick, as Foong reckons that M1 and StarHub’s current valuations are fair after the price fall. Foong also believes there is a big overhang on M1 and StarHub’s share prices, until the fourth player launches its service offering, when the market can get better visibility on the impact. CIMB is maintaining a “hold” call on StarHub and M1, citing their 5-7% yields are just sufficient to compensate investors for future earnings risk.
Shares of Singtel are up 2 Singaporean cents at S$3.76, M1 is flat at S$1.90, while StarHub is trading at S$2.91.