SingTel – CIMB
Telstra out of NBN race
Telstra said this morning that it has been excluded by the Commonwealth from Australia’s national broadband network (NBN) request for proposal (RFP) because it did not include a plan on how to involve small and medium enterprises in the building of the NBN.
Increases Optus’s chances? This is a surprising twist of events, although it was questionable if Telstra’s 15-page proposal would be accepted as a bid. With Telstra out of the NBN race, Optus’s odds of winning may be elevated as it is now the largest bidder, both in terms of network and balance sheet.
Negative on Optus if it wins. We reiterate our view that we would be negative on Optus if it wins the bid as the economics of the NBN is questionable given the astronomical estimated cost of A$10bn-15bn to be spent over five years, the long gestation period for this service, the retail pricing (which is unlikely to be significantly below current levels) and litigation/delay tactics employed by Telstra if Optus were to win and seek access to Telstra’s exchanges and last mile access.
We are especially concerned about funding as Optus is likely to shoulder the burden alone as its other consortium members lack the balance-sheet strength for a meaningful equity infusion. There has been talk that SingTel would contribute A$1bn- 2bn in equity for the project and an Optus spokesperson has said that “it (SingTel) would contribute whatever (funding) we needed to.” However, we believe that such injections would stretch SingTel’s balance sheet, which currently stands at 1.1x net debt/annualised EBITDA, and drain SingTel’s cash of S$1.1bn. This may hamper SingTel’s ability to pursue any acquisitive opportunities.
Telstra holds the advantage. Telstra holds the advantage by virtue of its incumbency, as it has cost advantage given its ownership of the copper network and passive infrastructure, scale and expertise. If Telstra loses, we believe it is likely to proceed with its own network along the lines of its proposal and roll out faster and gain access to consumers faster by undercutting the business case of the official NBN bid.
That said, Optus has sought an “overbuild” protection in its bid. i.e. to stop other players (especially Telstra) from rolling out their own network to compete with its NBN. However, it is uncertain if upgrading Telstra’s network will be considered building an alternative network and whether the government will grant Optus, if they win, the overbuild protection.
Valuation and recommendation
Maintain earnings forecasts, Neutral rating and sum-of-the-parts target price of S$2.72. Given the many moving parts and lack of transparency surrounding the NBN process, we are retaining our earnings forecasts and target price of S$2.72 for SingTel. Also intact is our NEUTRAL rating. We believe the stock lacks catalysts due to currency volatility despite its holdings in free cash flow-positive Tier-1 telcos in the region.