Author: kktan
TELCOs – DBSV
Regulator tightens belt to press the pedal on fiber
What's new?
Singapore telecoms regulator IDA is raising the weekly fiber installation capacity to 3,100 per week from Aug 2 onwards. This is up 30% from 2,400 earlier and exceeds our forecast of a 15% rise highlighted in our report on SingTel released on 2nd July. A dynamic mechanism to raise capacity in line with demand has also been put in place.
200 installations out of the quota will be for commercial buildings. This is the most attractive pie for retail service providers as each commercial connection commands much higher ARPUs than residential connections. IDA wants OpenNet (the fiber backbone provider) to offer an activation period of 10 days from its side, unless building owners cause a delay in wiring up their buildings.
Our view
Slightly negative for SingTel but positive for others. The commercial broadband market represents the biggest slice of the market, accounting for an estimated 60% of the total, with residential accounting for less than 40%. SingTel is the leader in the commercial space with an estimated 80% share of the commercial broadband market while StarHub has less than 20% due to difficulties in accessing commercial buildings. SingTel has differentiated itself on the basis of its strong managed service portfolio, cloud computing and strong IT support. However, SingTel's market share and margins may still feel the heat as retail service providers offer services to price-sensitive small and medium (SME) customers. SingTel may barely achieve stable Singapore EBITDA in FY13F compared to our expectations of 3% growth. Ongoing re-structuring and its mobile advertising business are other cost pressures in the near term.
S-curve ahead as Singapore lags Malaysia in fiber adoption. Fiber adoption stands at 12% of rollout in Singapore versus 25% in Malaysia, due to the various bottlenecks the regulator IDA has identified and wants to quickly resolve. Compared to only 99k fiber subscribers in Singapore at the end of 2011, we project at least 150K subscribers to be added each year for the next three years in line with the "S curve".
No change to our TP and recommendations on stocks under our coverage.
SingPost – OCBC
IMPACT FROM REVISED QoS FRAMEWORK LIKELY LIMITED
•Changes in QoS framework
•Do not foresee an impact
•Seeks growth on back of stable mail business
Revised Quality of Service Framework
The Infocomm Development Authority of Singapore (IDA) has revised the Quality of Service (QoS) framework for postal services. A key change is the increase in financial penalty for breach of the standards – a penalty of up to S$50,000/month per indicator may be imposed for non-compliance. This compares with the current penalty of S$1,000- S$5,000/month per indicator. The second key change is the requirement for SingPost to appoint an independent assessor to conduct a sampling letter test.
How will this impact SingPost?
The revised framework will be applicable to Singapore Post’s (SingPost) basic letter delivery service (effective 1 Jul 2012), and does not apply to parcel deliveries. According to statistics collected by SingPost in recent years, the group has been delivering over and above IDA’s requirements. Should this trend continue, we do not foresee an impact from the increase in penalty. Meanwhile, SingPost’s compliance with IDA’s QoS framework is currently measured via a sampling letter test that is carried out by SingPost itself. Under the new framework, SingPost has to appoint an independent assessor to conduct the sampling letter test at SingPost’s cost as an additional method of measuring compliance.
Expanding other divisions while being true to the core
A structural decline in the mail business due to e-substitution and lifestyle changes has affected personal correspondence and business transactional mail. However, growth in direct marketing mail has been observed, supporting mail volumes. We appreciate SingPost’s dominant domestic market position, operating efficiency, and stable operating cash flows. We are also mindful of margin pressures as well as the relatively limited growth opportunities in the core mail business. However, the group is seeking geographical and business expansion in logistics and retail, with continued investments in its core mail business. Maintain BUY with S$1.14 fair value estimate.
SingPost – OCBC
IMPACT FROM REVISED QoS FRAMEWORK LIKELY LIMITED
•Changes in QoS framework
•Do not foresee an impact
•Seeks growth on back of stable mail business
Revised Quality of Service Framework
The Infocomm Development Authority of Singapore (IDA) has revised the Quality of Service (QoS) framework for postal services. A key change is the increase in financial penalty for breach of the standards – a penalty of up to S$50,000/month per indicator may be imposed for non-compliance. This compares with the current penalty of S$1,000- S$5,000/month per indicator. The second key change is the requirement for SingPost to appoint an independent assessor to conduct a sampling letter test.
How will this impact SingPost?
The revised framework will be applicable to Singapore Post’s (SingPost) basic letter delivery service (effective 1 Jul 2012), and does not apply to parcel deliveries. According to statistics collected by SingPost in recent years, the group has been delivering over and above IDA’s requirements. Should this trend continue, we do not foresee an impact from the increase in penalty. Meanwhile, SingPost’s compliance with IDA’s QoS framework is currently measured via a sampling letter test that is carried out by SingPost itself. Under the new framework, SingPost has to appoint an independent assessor to conduct the sampling letter test at SingPost’s cost as an additional method of measuring compliance.
Expanding other divisions while being true to the core
A structural decline in the mail business due to e-substitution and lifestyle changes has affected personal correspondence and business transactional mail. However, growth in direct marketing mail has been observed, supporting mail volumes. We appreciate SingPost’s dominant domestic market position, operating efficiency, and stable operating cash flows. We are also mindful of margin pressures as well as the relatively limited growth opportunities in the core mail business. However, the group is seeking geographical and business expansion in logistics and retail, with continued investments in its core mail business. Maintain BUY with S$1.14 fair value estimate.
SingTel – DBSV
Three thorns – Bharti, currency and ICO
• Instead of easing, competition is intensifying in India; a weak Rupee compounds the problem further
• Upcoming Inter Connect Offer (ICO) may spur faster fiber adoption along the S-curve in Singapore
• The stock is trading at 13.4x PE versus 13.2x historical mean; Downgrade to HOLD as we see total potential returns of only 5% including dividends
Tariff cut of ~50% in India from May onwards. Leading operators including Bharti have lowered tariffs to 0.5 paisa per sec from 1.0 paisa through discount vouchers. At the same time, dealer commissions have also been raised substantially. We are not sure whether market leaders have embarked on these aggressive strategies to stem market share loss or whether small operators are trying to inflate their subscriber numbers before the expiry of 2G licenses.
Weak Indian Rupee (INR) is a key concern. INR has declined another 8% against SGD over the last 3 months. Normally this should have a 1% adverse impact on SingTel’s earnings. However, Bharti has a large USD denominated foreign debt which may result in significant forex losses. This could result in FY13F earnings growth coming in lower than our below consensus projection of 50% in INR terms.
Upcoming ICO to spur fiber adoption along the S-curve. In Singapore, regulator IDA is finalising the new ICO, which should help address key bottlenecks (installation quota) and have a regular review mechanism in place for the National Broadband Network. We expect 10-15% increase in the regular installation quota in 3Q12E and a similar increase in 4Q12E with six monthly reviews. An aggressive ICO could result in SingTel barely achieving stable Singapore EBITDA in FY13F compared to our expectations of 3% growth. There are other cost pressures in Singapore too.
Downgrade to HOLD with SOP based TP of S$3.29. The key change is weaker INR assumption in our valuation. SingTel has outperformed the STI by 8% over the last six months, which may not continue. We like SingTel’s strategy of venturing into mobile advertising space and its bold restructuring exercise. However, we expect to see cost pressures in the near term, before rewards in the longer term.
SingTel – DBSV
Three thorns – Bharti, currency and ICO
• Instead of easing, competition is intensifying in India; a weak Rupee compounds the problem further
• Upcoming Inter Connect Offer (ICO) may spur faster fiber adoption along the S-curve in Singapore
• The stock is trading at 13.4x PE versus 13.2x historical mean; Downgrade to HOLD as we see total potential returns of only 5% including dividends
Tariff cut of ~50% in India from May onwards. Leading operators including Bharti have lowered tariffs to 0.5 paisa per sec from 1.0 paisa through discount vouchers. At the same time, dealer commissions have also been raised substantially. We are not sure whether market leaders have embarked on these aggressive strategies to stem market share loss or whether small operators are trying to inflate their subscriber numbers before the expiry of 2G licenses.
Weak Indian Rupee (INR) is a key concern. INR has declined another 8% against SGD over the last 3 months. Normally this should have a 1% adverse impact on SingTel’s earnings. However, Bharti has a large USD denominated foreign debt which may result in significant forex losses. This could result in FY13F earnings growth coming in lower than our below consensus projection of 50% in INR terms.
Upcoming ICO to spur fiber adoption along the S-curve. In Singapore, regulator IDA is finalising the new ICO, which should help address key bottlenecks (installation quota) and have a regular review mechanism in place for the National Broadband Network. We expect 10-15% increase in the regular installation quota in 3Q12E and a similar increase in 4Q12E with six monthly reviews. An aggressive ICO could result in SingTel barely achieving stable Singapore EBITDA in FY13F compared to our expectations of 3% growth. There are other cost pressures in Singapore too.
Downgrade to HOLD with SOP based TP of S$3.29. The key change is weaker INR assumption in our valuation. SingTel has outperformed the STI by 8% over the last six months, which may not continue. We like SingTel’s strategy of venturing into mobile advertising space and its bold restructuring exercise. However, we expect to see cost pressures in the near term, before rewards in the longer term.