TELCOs – DBSV

NBN- the moment has arrived

Two new entrants in the broadband sector, five more expected by end of 2010.

The real battle is for SME and corporate customers, where EBITDA margins are much healthier.

StarHub’s estimated 25% of earnings and SingTel’s 10% of group earnings would be subjected to competition from new entrants.

Two new entrants, five more expected. SuperInternet and LGA are two new entrants as retail service providers (RSPs). LGA would target mainly SME and corporate customers, while SuperInternet would compete in the consumer segment. NucleusConnect expects five more RSPs to enter the sector by the end of 2010. SuperInternet came out with the most aggressive monthly price of only S$49.80 for 100 Mbps speed compared to S$124 charged by StarHub for a similar plan before the launch of NBN. However, SuperInternet would not offer triple play bundling of mobile, pay TV and broadband as offered by StarHub.

Pricing plans suggest aggressive SuperInternet and M1. SingTel announced monthly retail pricing of S$85.90-S$109.90 for 150 Mbps-200 Mbps plans, which is quite reasonable compared to approx S$40 for the 6 Mbps plans being offered currently. However, SuperInternet and M1 announced 100 Mbps plans for only S$49.80 and S$59 respectively compared to S$124 charged by StarHub for a similar plan before the launch of NBN. We expect StarHub to offer lower price post NBN launch. M1 has solid island-wide distribution and branding, so incumbents need to be most cautious of M1, in our view.

SingTel has confirmed that it would be using its own OpCo in addition to StarHub’s NucleusConnect. In fact, SingTel’s OpCo would also compete with NucleusConnect in the wholesale of bandwidth to RSPs. We like to remind investors that NetCo is allowed to sell its capacity to other OpCos, only if NucleusConnect’s market share exceeds 25%. This should not be a hindrance for NetCo as StarHub (natural customer of NucleusConnect) already exceeds 25% market share.

Prefer SingTel and M1 to StarHub. Due to its more diversified earnings base, data and Internet segment accounts for an estimated 10% of SingTel’s group earnings. For StarHub, data and broadband segment accounts for an estimated 25% of earnings. M1 is the only telco to gain from NBN and we expect the share price to benefit as market gains confidence in M1’s execution.

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