TELCOs – DBSV

Three keys:4G, NBN & Spectrum

  • No premium pricing for 4G, but lower data caps will drive moderate growth; Extra 1GB costs S$5-6 now (free before) Expect market shares to change in corporate data market as StarHub spends capex on top of Broadband Network (NBN) to extend its reach
  • Spectrum sale could be a burden especially for smaller telcos with higher gearing
  • Top pick: StarHub for higher dividend yield, superior growth and lower gearing than peers

Lower data caps to drive growth M1’s attempt to charge an extra S$10 for 4G service did not succeed as SingTel did not respond in kind. How can a Telco charge a premium when real 4G speeds are limited to few spots? We understand 4G speeds drop sharply as a user moves away from 4G base stations. However, Telcos are using 4G as an excuse to lower data-caps, which should benefit ARPU moderately. Currently, heavy data users (~10% of the total) have to pay S$5-6 to enjoy an extra 1GB or S$20 for additional 2GB bundled with more voice minutes and SMS.

StarHub may gain market share in corporate data space. SingTel leads in the corporate data market with ~ 80% share of a market that is worth over S$1.5bn. StarHub has less than 20% share as it did not have cables that reach commercial buildings. Progress has been slow on this front as NBN provides access to the buildings but not the individual floors due to operational issues. However, it is ready to spend some capex to wire up the buildings now. Recently, StarHub also started to offer data-mining services to small & medium size enterprises to strengthen its business relationships.

Telcos may have to spend S$80m-S$100m in spectrum auction in 2013. The regulator is expected to re-farm and auction the 1800MHz, 2.3GHz and 2.5GHz spectrum bands in 1H13. The cost is significant for smaller players with higher gearing.

BUY StarHub for 5.8% yield. StarHub’s net debt to EBITDA stands at 0.5x compared to 1.0x for peers. This implies it can afford to pay additional S$350m dividends (21 Scts DPS or 5.5% yield) to reach 1.0x net debt to EBITDA. With spectrum sale due in 1H13, it is even more important to have lower gearing.

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