SingTel Crimps The Data Pipe Further

Step forward for telcos. SingTel’s decision to cut data caps for smartphones is a big step toward better data monetisation opportunities for Singapore telcos. That said, the short-term impact will be minimal as the majority of 3G data users do not exceed 2GB of data a month. Over time however, it will encourage more data usage, especially on the video front, and this should lead users to adopt LTE as well as upgrade their plans, thus benefiting the telcos’ data revenue and margins. We retain our BUY calls on StarHub and M1, and SELL on SingTel.

SingTel reins in generous data caps. SingTel’s new 4G plans were significant not because it is the first telco to launch 4G smartphone plans, but because it has slashed data caps for both its 3G and 4G plans. From a two-tiered 12GB and 30GB (although not unlimited, these caps were still very generous), SingTel now offers four tiers of 2GB, 3GB, 4GB and 12GB. Monthly subscription prices have remained the same but SingTel has also increased the number of bundled SMS.

StarHub and M1 likely to follow suit. Now that the giant has stepped forward to lead the way, the other telcos are likely to follow. According to the media, StarHub will soon cut its single-tier 12GB smartphone and iPhone plans to tiers of 1GB, 2GB and 5GB to match its Multi-SIM plans for tablets and mobile phones. Similarly with M1, although it has said it will only unveil its plans in 2H12. Also, we think both smaller telcos will take the opportunity to do away with their unlimited plans.

Churn could rise in rush to lock in larger data caps. SingTel’s churn rate could rise in 3Q12, as its out-of-contract subscribers may switch to the other two telcos to lock in their still-generous data caps for another two years. This is especially so if StarHub and M1 hold off on dumping their higher data caps for a couple more months. We reckon this is probably why StarHub warned it would also be cutting caps soon but provided no other details.

Gradual adoption. The decision to cut down on data caps should be positive for ARPUs further out but the short-term impact will likely be minimal as the majority of data users do not exceed 2GB of data a month. Over time, more 4G handsets will become available, and the faster speeds will encourage more data usage and prompt users to upgrade their plans, thus benefiting data revenue. Higher adoption of tablets will also drive more data usage. More importantly, data margins will also benefit.

Prefer StarHub and M1 to SingTel. This development does not change our calls, which stand at BUY on StarHub and M1 and SELL on SingTel. We still like StarHub and M1 for their attractive yields of about 6%. In fact, StarHub’s yield could get more attractive as we believe its balance sheet can support a higher regular dividend. While the cut in data caps will benefit its domestic business, SingTel faces significant risks from overseas, particularly on the currency and regulatory fronts.

SingTel Crimps The Data Pipe Further

Step forward for telcos. SingTel’s decision to cut data caps for smartphones is a big step toward better data monetisation opportunities for Singapore telcos. That said, the short-term impact will be minimal as the majority of 3G data users do not exceed 2GB of data a month. Over time however, it will encourage more data usage, especially on the video front, and this should lead users to adopt LTE as well as upgrade their plans, thus benefiting the telcos’ data revenue and margins. We retain our BUY calls on StarHub and M1, and SELL on SingTel.

SingTel reins in generous data caps. SingTel’s new 4G plans were significant not because it is the first telco to launch 4G smartphone plans, but because it has slashed data caps for both its 3G and 4G plans. From a two-tiered 12GB and 30GB (although not unlimited, these caps were still very generous), SingTel now offers four tiers of 2GB, 3GB, 4GB and 12GB. Monthly subscription prices have remained the same but SingTel has also increased the number of bundled SMS.

StarHub and M1 likely to follow suit. Now that the giant has stepped forward to lead the way, the other telcos are likely to follow. According to the media, StarHub will soon cut its single-tier 12GB smartphone and iPhone plans to tiers of 1GB, 2GB and 5GB to match its Multi-SIM plans for tablets and mobile phones. Similarly with M1, although it has said it will only unveil its plans in 2H12. Also, we think both smaller telcos will take the opportunity to do away with their unlimited plans.

Churn could rise in rush to lock in larger data caps. SingTel’s churn rate could rise in 3Q12, as its out-of-contract subscribers may switch to the other two telcos to lock in their still-generous data caps for another two years. This is especially so if StarHub and M1 hold off on dumping their higher data caps for a couple more months. We reckon this is probably why StarHub warned it would also be cutting caps soon but provided no other details.

Gradual adoption. The decision to cut down on data caps should be positive for ARPUs further out but the short-term impact will likely be minimal as the majority of data users do not exceed 2GB of data a month. Over time, more 4G handsets will become available, and the faster speeds will encourage more data usage and prompt users to upgrade their plans, thus benefiting data revenue. Higher adoption of tablets will also drive more data usage. More importantly, data margins will also benefit.

Prefer StarHub and M1 to SingTel. This development does not change our calls, which stand at BUY on StarHub and M1 and SELL on SingTel. We still like StarHub and M1 for their attractive yields of about 6%. In fact, StarHub’s yield could get more attractive as we believe its balance sheet can support a higher regular dividend. While the cut in data caps will benefit its domestic business, SingTel faces significant risks from overseas, particularly on the currency and regulatory fronts.

END OF UNIVERSAL SET‐TOP BOX DREAM HURTS M1

The IDA (Infocomm Development Authority) and MDA (Media Development Authority) have decided to drop their search for a standardised box through which the country’s various entertainment providers could reach homes.

Dubbed Project Nims (next generation interactive multimedia applications and services), it was to have provided a nationwide platform for video and interactive digital services over the next‐gen nationwide broadband network (NBN).

Delivering video over the new fibre network would have made it easier for smaller players to jump on and provide pay TV services. Home viewers could have accessed content without having to deal with multiple box providers.

The IDA started conceptualisation in 2009, and in September 2010 launched a request‐for‐proposal to the industry, to select an operator for the Nims platform.

It received bids from the country’s three telcos, M1, SingTel and StarHub. Ten rounds of discussion with each provider, including technology demonstrations later, it appears the IDA and MDA have exhausted this avenue.

The agencies said: “None of the bids, as submitted, are likely to achieve the desired outcomes.”

BT understands that there were a number of issues preventing some of the proposals from scaling, including both technology and business constraints.

The box was originally slated to be launched commercially this year.

Each of the three bidders has its own pay TV service. Incumbent StarHub has the largest, at 544,000 cable subscribers. This is followed by SingTel’s IPTV mio service at 368,000, launched in 2007.

The newest entrant, M1, has its 1box service, launched end‐2010.

The service rides on M1’s broadband services carried to homes on cable and ADSL networks leased from StarHub and SingTel respectively, as well fibre connectivity on the newer NBN.

Nims no more

We are positively surprised by the regulators’ decision to drop plans for the development of a common set-top box (STB) for pay TV. This will be positive for the incumbents, especially StarHub, as it raises entry barriers. Newcomers will now have to provide a STB instead of using a common one.

We continue to advocate StarHub, for a potential increase in its dividends or capital repayment given its low net debt/EBITDA, providing re-rating catalysts.

What Happened

Singapore’s telecom and multimedia regulators have decided to drop their search for a standardised pay-TV set-top box, dubbed Project Nims (next generation interactive multimedia applications and services), as the bids would not have achieved the desired outcome. There were issues preventing some of the proposals from gaining traction, including technology and business constraints. It was supposed to be undertaken by NIMSCo to build, design and finance the project backed by grants from the government.

What We Think

This will be positive for the incumbents, we reckon, especially StarHub, since it would raise entry barriers for newcomers. Aspiring pay-TV operators would have to develop their STB rather than turn to a common one that would probably be supplied by OpenNet.

Nims initially was supposed to lower the barriers of entry and spur new players in the PayTV market while increasing content variety. With the cancellation of Nims, regulatory risk is now lower and the probability of higher dividends or capital management from StarHub has risen, in our view. The other risk cited by StarHub is global economic uncertainties.

What You Should Do

Stay invested in StarHub, our top telco pick. We like it for a potential increase in dividends or capital repayment, given its low net debt/EBITDA of 0.5x, the lowest among Singapore telcos and substantially below its target of 1.5-2x.

1QCY12 REVIEW – OVERWEIGHT

•Stable 2012 outlook,

•But margins pressure exists

•Defensive earnings, attractive yields

1QCY12 results were in line

All three telcos recently reported 1QCY12 results which were in line with our forecasts. M1 and SingTel earnings were either spot on or within 2% of our estimates. Although StarHub’s earnings were 13.2% above our forecast, we note that the boost came from higher NBN roll-out adoption grants and higher amortised income; but EBITDA margin of 32.2% was in line with our forecast.

Review of Singapore mobile operations

No change in status quo in the post-paid mobile market – SingTel dominated with a ~47% share, followed by StarHub ~28% and M1 ~26%. Overall, the post-paid subscriber base grew by 38k QoQ to 4067k, with the bulk coming from SingTel (+30k). However, the 0.9% growth was the slowest since Mar 09; and could continue to slow as users shift towards multi-SIM plans for their mobile devices from dongles. Data as a percentage of ARPU is hovering around 37-42%, up from around 35-40% in 1QCY11; this as non-voice communication continues to gain popularity among smartphone users.

Stable 2012 outlook

Going forward, all the three telcos expect their Singapore operations to remain stable or show modest growth, buoyed by the increasing mobile data usage and also the NBN roll-out which is nearing completion. However, EBITDA margin outlook continues to remain fairly muted; and any boost from LTE is not likely to materialize substantially in 2012. Nevertheless, thanks to their strong cashflow generative businesses, the telcos have kept their dividend payout guidance, thus keeping their yields attractive.

Maintain OVERWEIGHT

With the exception of StarHub (+11% YTD), the other two stocks have underperformed (M1 -1.6%, SingTel -0.6%) versus the STI’s 5.2% gain. But with markets likely to remain volatile, we believe that the telcos’ defensive earnings and attractive yields offer a safe harbour for the risk-adverse investors. Maintain OVERWEIGHT. Our pick in the sector is M1.