Starhub - TPG a potent threat
- TPG wins new entrant auction at 3x the reserve price.
- Well-funded TPG could capture 8.5% mobile revenue share.
- Expect 25% decline in earnings by 2022 vs. 2015, from 21% earlier.
- Maintain Fully Valued with lower TP of S$2.65.
TPG secures the fourth player spectrum license.
- TPG snatched the spectrum license to become the fourth mobile operator in Singapore. The winning bid was a whopping S$105m, three times the minimum reserve price of S$35m.
- TPG will be allocated a total bandwidth of 60MHz (2x10MHz of 900MHz band and 40MHz of 2.3GHz TDD) with new spectrum rights commencing on 1 April 2017.
- TPG will be required to provide nationwide street level coverage for 4G within 18 months from the start of the new spectrum rights.
We project TPG to gain 8.5% mobile revenue share by 2022 versus 7% earlier.
- With an annual EBITDA of A$775m and FY16 (July yearend) net debt-to-EBITDA at 1.6x, TPG has enough room to raise over S$500m to S$1bn required to roll out a nationwide mobile network. Hence, we believe the impact on the incumbents from TPG’s entry to be more acute and we project TPG to secure 8.5% revenue share by 2022.
- In our bull-case and bear case scenario for the existing telcos, we project TPG to secure 6% and 10% revenue share respectively.
StarHub to fare better than its local peer M1.
- StarHub has a lower reliance on mobile revenue (~51% in 3Q16 vs. 68% for M1) and stickier, less price sensitive customer base. StarHub has also introduced more fixed-mobile bundling offers to reduce the loss of revenue share to a new entrant.
- We expect StarHub’s revenue share to drop from 30% in 2015 to 27% by 2022. As a result, we expect group earnings to drop by 25% from 2015 level by 2022.
- Recommend FULLY VALUED with lower TP of S$2.65.
- Our revised DCF-based (WACC 6.5%, terminal growth 0%) TP is S$2.65 as we factor in the impact of higher revenue share loss. Even under our bull-case TP of S$3.02, StarHub offers limited upside potential. Our bear case TP for StarHub is S$2.56.
Key Risks to Our View
- Sharper-than-expected decline in adoption grant. StarHub has guided that the adoption grant for fibre is likely to decline going forward.
- We project StarHub’s “Other Income” to decline from S$46m in 2015 to S$41m in 2016F and S$20m in 2017F due to this. However, the drop could be sharper than expected, depending on the fibre adoption rate.