SingTel – MS

Optus Investor Day: Key Takeaways

Quick Comment – Conclusion: We remain EW following the Optus Investor day. While the Australian business appears to be performing well in a wireless market that continues to deliver stronger growth than global peers, we see risks to the core Singapore business from NBN as well as “fairish” valuations at F’11e PE of 12.3x.

What’s new: Optus presented a bullish outlook for the Australian business at its investor day yesterday, driven principally by Optus’ continued strong growth in an increasingly attractive Australian wireless market. Opportunities may also emerge in fixed line, as the open-access National Broadband Network gradually replaces Telstra’s copper network, but these are a lot less clear. The question of a local IPO for Optus continues to be asked by the Australian financial community, but continues to be answered by SingTel management in the same way: there are no current plans to reduce SingTel’s stake in Optus, and any transaction must be value accretive.

Three Key Takeaways: 1) Australian mobile revenue growth at 8.8% in CY09 continues to comprehensively outpace other developed markets, which are flat or falling; 2) 60% of the mobile market growth is due to wireless broadband, which Australians are clearly embracing, refocusing the market away from calling to data services; 3) Optus is currently out-growing its rivals, at the expense of higher acquisition costs and consequently lower margins. Our view remains that this above-market growth is unlikely to be sustained. Telstra has already launched its competitive response to market share losses with the introduction of new ‘any-net’ cap plans. Notably, these plans extend down to the A$49 price point, Optus territory, but not to A$29, traditionally a Vodafone-3 stronghold.

Fixed Line Opportunity May Emerge post-NBN, But Competition is Likely to Erode Margins

Optus has been hampered in the fixed line market, in its view, by an uneven competitive environment dominated by Telstra. The National Broadband Network (NBN), a government-owned fibre replacement for the current copper last mile network, promises to improve Optus’ access to fixed line infrastructure. Unfortunately for Optus, the NBN will also improve infrastructure access for everyone else also. Optus management commented that they expect aggressive competition at the outset, but that new entrants may underestimate the skills required for success in fixed line, and subsequently exit, or be consolidated in the longer term. For Telstra, we assume that fixed line EBITDA margins will fall to ~20% post-NBN, and we attribute very little value to Telstra’s fixed line business post-NBN. At this stage we see a broadly similar outlook for Optus in fixed line.

Customer Transition to NBN Key to Retaining Value in Existing Fixed Line Business

We see some risk to the market share of incumbent fixed line service providers in the transition to NBN fibre-based services. If the government and/or competition regulator prompts customers to re-evaluate their choice of service provider as the NBN is connected to the customer’s premises (or customers do so of their own volition), incumbent market shares could be threatened by new entrants. Optus currently enjoys a 16.4% fixed revenue market share, which is well behind Telstra’s share, but still threatened in our view.

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