Singapore telco sector loses shine with new entrant likely

Singapore’s telco sector is seing a shakeup with three contenders throwing their hat into the ring to be the republic’s fourth player.

This has led Daiwa Capital Markets to downgrade the sector from “neutral” to “negative”. M1 has also been downgraded to “hold” with StarHub and Singtel held at “underperform” and “hold” respectively.

The possibility of a new player in the telecom market is now highly likely, notes analyst Ramakrishna Maruvada in a Monday report. This has a knock-on effect on the three incumbents, as they might have to spend more and offer larger discounts to retain their customers.

Of the three contenders, MyRepublic, airYotta and TPG Telecom, Ramakrishna notes that airYotta possesses a slim chance of meeting the prequalification criteria set by newly formed Infocomm Media Authority of Singapore (IMDA).

MyRepublic claims that it could survive with just 5% of the market rather than the conventional telecom yardstick of over 15%, highlights Ramakrishna, raising the issue whether IMDA will deem MyRepublic’s financing proposal acceptable.

ASX-listed TPG Telecom is Ramakrishna’s pick for a likely fourth operator, after it announced it intends to fund the business here with debt proceeds and cash flow from its Australian operation and given its experience as a mobile virtual operator in Australia.

Whatever the case, the new entrant could push prices higher in the spectrum auction, with Ramakrishna noting that the spectrum fees could be $342 million for Singtel and $171 million for StarHub and M1 in the worst-case scenario.

Average revenue per user (ARPU) is also expected to drop, with M1 projected to fall the most, as Ramakrishna expects the smallest and largely mobile operator to be aggressive in defending its market share.

Singtel’s revenue and EBITDA forecasts for FY18 to FY19 have been cut by 1% and 2% to 3% respectively, with a revised target price of $3.80.

Ramakrishna notes Singtel’s diversified revenue streams although its Indian associate is also facing challenges with disruptive price competition in its home market.

StarHub has a new target price of $3.04 with its 2016 to 2018 EBITDA forecast being cut 0.2% to 4.2%. Earnings per share forecasts have also been slashed 0.3% to 5.5% over the same period.

While StarHub’s mobile division will feel the most impact, its pay-tv division is expected to take a hit on subscriber numbers as cord-cutting continues, notes Ramakrishna.

Lastly, M1 has a new target price of $2.41, due to a cut in earnings outlook, as well as a projected lower dividends payout ratio of 80% for 2016 to 2018, compared to 90% previously as it tries to preserve capital.

“However we also believe that the current earnings profile that we forecast for the company appears to be largely discounted by the market,” says Ramakrishna.

“In addition, we believe that M1 is executing well in the fixed broadband market, where we expect it to continue to gain market share while making inroads into the enterprise market,” he adds.

Singtel closed 2 cents higher at $4.03, M1 closed 4 cents lower at $2.40 while StarHub closed 1 cent lower at $3.46.

This article first appeared in The Edge Singapore Market Report.

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