The Singapore telecom regulator has opened the market to a fourth operator (TPG), thereby increasing pressure on revenues and profits of the three incumbents. We have explained how this may force M1 and Starhub to cut dividends in a post in January. In this piece we would like to present the main takeaways from a research piece published by Credit Suisse on the second of March. Thanks to Chee Tiong Lim for kindly sharing the piece. The main takeaways are presented below.
Mobile pricing to fall by 15-25% over the next 3 years
Pricing for mobile data and calls will drop significantly as TPG rolls out its service. This is great news for consumers who will pay lower bills, but it will be painful for the incumbents – in particular M1 and Starhub who have significant exposure to the Singapore mobile market. According to the forecast, overall revenues from mobile in Singapore will trend lower for the next 6 years (-7%), in addition, these revenues will now be divided among 4 operators resulting in mobile (revenues at M1 and Starhub falling by 16% and 13% respectively.
Key TPG Forecasts
- The company will spend S$ 500m in CAPEX by 2021.
- It will start the mobile operation in 2H 2018 with 775 sites (base stations) and reach 1’000 sites by 2021
- The company has a good mix of low-band and high-band spectrum (2x10Mhz in 900Mhz and 2x40Mhz in 2300Mhz). This spectrum could support a market share up to 28%.
- TPG is expected to have 150 employees by 2021 (vs 1’500 at M1 today) – a lean operation indeed
- TPG will enter the broadband market (possibly before launching the mobile service) in order to compete more effectively in mobile.
Credit Suisse doesn’t expect TPG to become massively profitable over the forecast 2017-2022 period (although the break-even crucially depends on how much market share the company manages to take and how far ARPU will fall). Indeed, the profitability of the whole sector will fall due to new competition brought about by the entrance of TPG. Surely the incumbents (Singtel, Starhub and M1) will be cutting costs as revenues decline. The real winners will be the consumers who will get more data for less – the ultimate goal of the regulator.
Conclusion: Remain underperform on M1 and StarHub
The inevitable conclusion is to remain underweight the sector and in particular M1 and Starhub. Singtel is in a different situation as Singapore revenues represent a small portion of the company’s enterprise value – the bulk consists of its interests in Telekomsel (Indonesia), Bharti (India), AIS (Thailand), Intouch (Thailand), Globe (Philippines) as well as Optus (Australia). Shareprices of M1 and Starhub are down substantially over the past 2 years, however as per out analysis dividends are not sustainable – especially in this deteriorating environment.
As can be seen in the table below, valuation of M1 and Starhub (8x-9x EV/EBITDA) still appears to be on the high side within the sector. Given that earnings will be under pressure in the coming years, there will be further pressure on the share prices of these companies. As an aside, the company this analyst likes most from this list is SmarTone (315 HK) – but that’s an idea for another post!