SingTel – AmFraser
Optus considers sale of HFC to NBN
• Wholly-owned SingTel unit, Optus in Australia is evaluating various options for its participation in the Government’s National Broadband Network (NBN) project. These are:
(1) Taking an equity stake not exceeding 30%
(2) Not having a stake at all at the infrastructure level (i.e. the NBN) and just participating at the reseller level
(3) Selling its existing Hybrid fibre-coaxial (HFC) network to NBN either for cash or in exchange for an equity stake in NBN
• Brief recap: The Australia Government had rejected all bids for the NBN project in April 2008. It will instead spearhead the project by forming a new company to build and operate NBN. In the early years, the Government will own 51% stake, with the rest from private sector players.
• Based on a wholesale model, NBN will invest A$43bil over eight years to offer broadband speeds of up to 100 Mbps to 90% of all schools, homes and businesses, and delivery of up to 12 Mbps to the remaining. (See report 8 April 2009)
• We think a sale of its A$1.5bil HFC to NBN would make most fundamental sense for Optus, price notwithstanding. With the industry moving towards a high-speed NBN platform, Optus will be left stranded with a redundant legacy network. Optus’s HFC network was built in the early 1990s and offers speeds of up to 2 Mbps today as Optus had not focused on upgrading it.
• While the network is scalable and can be upgraded to higher speeds, this would seem a duplication of resources. If Optus plans to participate in the NBN, a high speed HFC platform will be competing headlong with NBN.
• Todate, Optus’s HFC covers much of metropolitan areas in Australia and provides access to 55% of population. But at (March) FY09, Optus’s had 525,000 customers using telephony services and 424,000 customers using broadband services on its HFC network, a small penetration of a market with Australis’s population at 21 million.
• At the same time, EBITDA margins for its Consumer and SMB segment are lowest among Optus’s three business segments – the other two being mobile, and business and wholesale. Service revenues from its HFC platform account for 71% of Consumer and SMB segment. For FY09, Consumer and SMB segment saw EBITDA margins of 14%, much lower than 28% for mobile and 24% for business and wholesale.
• All said, it is still early days in anticipating the route NBN will take. The Government is currently carrying out an implementation study, which will take about nine months to complete from time of announcement in April.
• We maintain our HOLD rating on SingTel, which is trading at 4% premium to fair value of S$2.80/ share.