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Telecommunications Singapore - UOB Kay Hian 2016-12-15: TPG Emerges As Winner

Telecommunications Singapore - UOB Kay Hian 2016-12-15: TPG Emerges As Winner Singapore Telco Sector SINGTEL Z74.SI M1 LIMITED B2F.SI  STARHUB LTD CC3.SI 

Telecommunications Singapore - TPG Emerges As Winner

  • TPG’s likely participation in the upcoming general spectrum auction (stage B) could pose a threat to the incumbents although potential damages are limited by spectrum caps. 
  • Nevertheless, it signals that TPG intends to be a disruptive force and will make the incumbents sweat to hold on to their existing mobile subscribers.
  • Competition is expected to intensify ahead of the launch by TPG. 
  • Maintain UNDERWEIGHT.



WHAT’S NEW


The winner is TPG. 

  • The tussle between MyRepublic and TPG Telecom (TPM AU) to be the fourth mobile operator has come to a conclusion with TPG emerging as the winner.
  • We understand that the new entrant spectrum auction (stage A) lasted for two days. The winning bid was S$105m for 20MHz of 900MHz spectrum and 40MHz of 2300MHz spectrum to be utilised for provision of 4G services. The spectrum rights commence on 1 Apr 17 and will be for 16 years.
  • We view the price tag of S$105m (reserve price: S$35m) as attractive, given the quality and quantity of spectrum secured.

TPG could turn disruptor the soonest. 

  • The announcement from the Infocommunications Development Authority (IMDA) specifically states that TPG may also participate in the upcoming general auction that is mainly for the incumbents although caps are imposed to ensure no telco corners any specific frequency bands. The spectrum caps imposed on TPG are: a) 40MHz for 700MHz, b) 20MHz for 900MHz and c) a total of 75MHz (global cap for both new entrant spectrum auction and general spectrum auction). This means TPG could bid for another 15MHz of spectrum from the 700MHz and 2500MHz frequency bands.
  • We note that StarHub has amassed a war chest after raising S$300m through its medium-term note programme in May 16. Its cash holding was S$432.6m as of Sep 16. Thus, we expect competition to intensify during the general spectrum auction (stage B).


ACTION


Anticipates more heated competition before TPG’s launch. 

  • Competition has intensified ahead of entry of the fourth mobile operator. All three incumbents have introduced attractive data upsize options this year. We expect this trend to continue.
  • Incumbents are likely to dangle attractive promotions to attract consumers to re-contract earlier but get locked-up in new 2-year contracts ahead of the launch by TPG.
  • M1 and StarHub posted disappointing 3Q16 results, and their earnings are likely to continue to be under pressure.

Steepening of yield curve negative for telco sector. 

  • President-Elect Donald Trump’s intention to boost infrastructure spending, cut taxes and reduce regulations has rekindled expectations of stronger economic growth and higher inflation. The 10-year Singapore government bond yield has risen 65bp to 2.83%. Yield curves have also steepened.
  • Higher bond yields make yield plays, such as telcos, less attractive as yield spreads narrow.

Historical dividend yield could be deceiving. 

  • Share prices of M1 and StarHub have corrected 29.6% and 26.8% respectively from their recent peaks. It is, therefore, tempting to bottom fish. However, their attractive 2017F dividend yields of 5.7% and 6.9% could be deceiving. 
  • If we look ahead further, M1 and StarHub’s 2019F dividend yield would moderate to 4.3% and 5.5% respectively.

Maintain negative stance. 

  • Maintain BUY for Singtel (BUY/S$3.76/Target: S$4.53) as its mobile business in Singapore accounts for 13% of group revenue (7% if we include the proportionate share of associates’ revenue). 
  • SELL M1 (SELL/S$2.02/Target: S$1.76) and StarHub (SELL/S$2.90/Target: S$2.40) as they are vulnerable to increased competition in the mobile business in Singapore.


SECTOR CATALYSTS

  • Investors buying into Singtel as a defensive shelter.
  • TPG launches mobile services with attractive features and unbeatable pricing.


ASSUMPTION CHANGES

  • None.


RISKS

  • The fourth mobile operator uses low pricing to win market share.






Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-12-15
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 1.76 Down 1.76
BUY Maintain BUY 4.53 Same 4.53
SELL Maintain SELL 2.40 Same 2.40






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