Writing is on the wall – NBN

Story: The award of NetCo contract to OpenNet (SingTel consortium) is as per market expectations. Three new key points to note are:

(i) OpenNet has offered whole price of S$15 and S$50 for residential and non-residential users, compared to cap of S$25 and S$75 imposed by IDA.

(ii) SingTel would transfer its existing network to a new company called AssetCo, which would lease the network to OpenNet consortium. SingTel has committed to reduce its stake in AssetCo in another five years.

(iii) OpenNet would spend about S$2bn over the next 25 years, including up to S$750m in subsidy.

Point: We highlight three key implications for the sector:

(a) NBN to benefit consumers and business at the cost of service providers. NBN would bring a shift to regulated wholesale price and multiple retail service providers (RSP) from unregulated price and effective duopoly today. This should result in more competitive pricing and differentiated offerings. We estimate retail price could be S$25-30 per month for 100 Mbps in 2010, compared to S$45-50 for 8- 12 Mbps today. This is also supported by the fact that broadband tariff in Hong Kong is less than S$20 for 10 Mbps today.

(b) Less impact on SingTel than StarHub due to its diversified earnings base. StarHub’s existing network may not be able to compete with the high speed and competitive rates offered by NBN. Broadband business constitutes an estimated 20% of StarHub’s earnings, and less than 10% of SingTel’s earnings. These companies may have to contend with lower margin – RSP business in the future.

(c) M1 is the only beneficiary. Unlike SingTel and StarHub, M1 stands to gain from NBN by entering as retail service provider (RSP). Although, RSP opportunities may not be big due to high broadband penetration in Singapore, it would still help M1 to grow its bottom-line.

Relevance: We prefer M1 for its attractive valuations and regular dividend yield of c. 8%. We see more downside for StarHub, and believe that the large valuation gap between it and M1 should narrow going forward. We rule out capital management with FY08 results from StarHub and M1 due to higher borrowing costs. StarHub has indicated that it might wait for six months or more to refinance its debt, which will mature soon.

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