Category: M1
TELCO – OCBC
Value plays with attractive yields
Entering into new era with NBN. Singapore will start rolling out the Next Generation National Broadband Network (NBN) from 2010 onwards as part of its NI2015 Master Plan. SingTel and StarHub will have big roles to play – the former as the NetCo (in charge of rolling out the fiber connections) and the latter as the OpCo (responsible for designing, building and operating the active infrastructure). The broadband connectivity will then be packaged and resold by RSPs – with MobileOne (M1) likely to be one of them – to end users. As such, we expect to see some shakeup in the fixed broadband and network services segments.
Big shakeup in Pay TV arena. Another area of big changes will be in the Pay TV arena, especially in the sports segment. SingTel has recently won the exclusive broadcast rights for the English Premier League for the 2010-2012 seasons; it has also scored a coup by luring ESPN STAR Sports (ESS) from StarHub from mid-2010. But StarHub has responded with two free sports channels of its own and may have cards up its sleeve to combat subscriber defection. And with the NBN and its higher bandwidth capacity, we can expect the content-on-demand market to hot up as well.
Status quo for mobile segment. As for the telcos’ mainstay business, we pretty much expect things to remain status quo. Both M1 and StarHub have recently obtained the “rights” to distribute the Apple iPhone 3GS, breaking SingTel’s near 2-year monopoly on the much-craved smartphone. However, it is unlikely that M1 and StarHub would use the phone to gain market share but probably more to reduce their monthly churns. As such, we do not expect any debilitating price wars. And with the global economy slowly starting to recover, we may also see a modest rebound in core earnings.
Value plays with attractive yields. Stock markets around the world have recovered strongly since hitting multi-year lows in Mar 2009. But with the economies still lagging somewhat behind, significantly higher valuations may be harder to come by in 2010. Instead, investors may be keen to look for value i.e. at laggards with strong fundamentals, and the telcos fit the bill. We see their attractive dividends (mainly M1 and StarHub) as another plus point. We also believe that the rollout of the NBN from mid-2010 will bring new opportunities for all the three telcos. As such, we maintain our OVERWEIGHT rating on the sector.
TELCO – AmFraser
Mobile broadband bumps numbers up
Investment Highlights
• IDA statistics show aggregate residential and corporate broadband subscribers grew a strong 9% QoQ in 3Q09 to 1.6 million. But fixed broadband (BB) subscribers – predominantly xDSL and cable modem subscribers – grew a slower 3% QoQ to 1.1 million. The fixed BB market share continued to fall from 77% at end 2008 to 66%.
• Mobile broadband provided boost, surging 26% QoQ to 560,000 subscribers. Voracious appetite for Internet access over mobile networks via smartphones and laptops, remain unabated. Via laptop access alone, M1 reported a 9% QoQ rise in mobile data users to 149,000. Including those accessing via smartphones, M1’s base is 35% higher at 201,000, after net adds of nearly 8,000/month in 3Q09. SingTel added a much stronger 27,000/month by this broader measure to 306,000 subscribers, attributed largely to its launch of the new iPhone 3G S. StarHub does not disclose its mobile data user base, but revealed a 36% QoQ surge in mobile data traffic to 2.2 million gigabytes in 3Q09.
• StarHub continues to take fixed broadband market share from SingTel. StarHub’s cable modem platform enjoyed net adds of 7,500/month in 3Q09, far exceeding net add of 1,100 for xDSL users on SingTel’s platform. That said, much of StarHub’s net adds were due to its free 1Mbps offering bundled with its HubStation service (a value-added cable TV set-top box). As StarHub reported 392,000 paying broadband subscribers, its free 1Mbps service accounted for net adds of 6,500/month. Overall, cable modem BB had a market share of 52%, with xDSL having 48%. StarHub’s paying cable modem base had a share of 36%.
• Legacy broadband approaching saturation. While IDA reports household broadband penetration at 129%, this figure is being bumped up by double counting from the inclusion of mobile broadband. We estimate household broadband penetration at closer to 80%, stripped of mobile BB. Even so, this represents a saturated market for broadband. On paid BB services, take-up has been hovering at an unexciting 1% QoQ growth in recent quarters. We project StarHub reporting 6% YoY growth in paying broadband subscribers to 397,000 for FY09, and SingTel to report 2% YoY growth to 510,000 for FY10 (YE March).
• Broadband ARPU to fall in run-up to NGNBN. After a 7% QoQ fall in 2Q09, StarHub continued to see a 2% QoQ fall in 3Q (to S$50/month) due to down-trading of broadband speeds. SingTel fared better at -1% QoQ fall in 3Q09 (to S$59.5/month) and flat for the previous quarter. In the run-up to the commercial launch of the Next Generation National Broadband Network (NGNBN) in 2Q10, we expect downward pressure on broadband ARPU to continue.
• Next growth phase from NGNBN from 2Q10. NBN’s network rollout by OpenNet (NetCo in which SingTel has 30%-stake) is scheduled for 60% completion by end 2009. After which, Nucleus Connect (StarHub’s 100%-owned OpCo) will start to wholesale fibre connectivity in 2Q10. As NBN provides broadband speeds starting from minimum 100Mbps, scalable up to 1 Gbps, Retail Service Providers (RSPs) will be tagging on advanced applications and services for a higher value proposition. M1, StarHub and SingTel will be participating as RSPs, among other entrants to broadband.
• New NBN opportunities have biggest impact on M1. We think incremental benefit will be felt most at M1, which is hitherto a mobile service provider while NBN opens up a new revenue stream. Whereas incremental benefit to StarHub and SingTel will be more marginal as they shift their legacy broadband base over to NBN.
• Reiterate BUY rating on M1 with fair value at S$2.20/share. Maintain HOLD ratings on StarHub and SingTel.
M1 – CIMB
Highlights from luncheon
Luncheon in Singapore
We hosted a post 3Q luncheon with representatives of M1 on Oct 20th following its 3Q results on Oct 16th. The company was represented by Karen Kooi (CEO), See Leng Sim (Deputy Director of Finance) and Ivan Lim (GM, Finance and IR). There were a total of 8 clients who attended the function. The key talking points centred around the next generation national broadband network (NGNBN), the Qala acquisition, roaming, its single product disadvantage and capital management initiatives. We maintain our earnings forecast, target price of S$2.07 (WACC: 9.5%, LT growth: 1%), and NEUTRAL call. We see a lack of price catalysts but this is offset against the attractive yield of 21% for FY10 which includes our expectations of a special dividend, the most upside to NGNBN and the best exposure to wireless broadband.
In a good position for NGNBN
Qala acquisition to fill in gaps. The Qala purchase provided M1 with access to the corporate fixed broadband market and a customer base to leverage on. Its product suite would also be enhanced as it could provide managed services as well. M1 has commenced the integration process and would realise cost savings from nonduplication systems such as billing and through the rationalisation of staff. Qala is profitable despite a small customer base and has the potential to grow. From this point on, M1 ruled out making other acquisitions as it would only pursue the organic route.
Tight-lipped about strategy. M1 would not divulge specifics over its strategy towards NGNBN. But consistent with its style, M1 would not compete on pricing nor would it bid for premium content. However, we see pricing as an important lever as M1 lacks a unique selling proposition and we gather that some retail service provider (RSP) would be disruptive from the outset. M1 reiterated its longer term goal of obtaining a 20% market share in the corporate and residential fixed broadband market by 2015. Assuming broadband prices remain stable, M1 estimates that the 20% market share could provide a 40% uplift to current revenue.
Roaming to potentially boost earnings
Greater tourist arrivals beneficial in two ways. The opening of the two integrated resorts (IR) in 2010 is expected to draw an additional 2-3m visitors to Singapore, according to the Singapore Tourism Board. The arrival of more visitors would benefit M1 in two ways, namely higher roaming and prepaid revenue. We estimate that FY10’s earnings could be lifted by 5-8% from the additional tourists. We detail our assumptions below. This could also help to spur roaming revenue which has not recovered as roaming traffic was still down some 25-26% on a yoy basis.
• We assume that each tourist would spend the same amount as they did in FY08
• We assume that inbound roaming constitutes 75% of the total roaming revenue
• We assume that EBITDA margins for inbound roaming is 60%
• M1 would capture 30% of the new visitor arrivals
• 5% of the new arrivals would purchase a S$15 prepaid card
Preferred partner to Axiata and Vodafone. M1 is the preferred roaming partner to both Axiata and Vodafone which means that their subscribers automatically lock-on to to M1’s network when they enter Singapore. While the partnership with Axiata was expected given the shareholding linkages, the Vodafone deal is a more stunning coup.
It first secured the deal in 2003 and has recently renewed the arrangement for a further 3 years to 2012. In exchange for a fee, Vodafone supplies business products (such as dongles) at cheaper prices, gets preferential roaming and signalling arrangements. About 70% of Vodafone’s inbound arrivals lock on to M1’s network when they are in Singapore but M1 did not disclose the revenue contribution.
Other updates
Capital management. M1 would not rule out capital management for FY10 but the final decision rested with the board and any decision would only occur after it had refinanced its S$250m loan due in May 2010. The board has traditionally been conservative and would not support a special dividend unless the environment improves.
We are more optimistic and have built in a special dividend of 23.5 cts/share into our forecast. We expect credit markets to recover and had previously forecasted M1’s net debt/EBITDA to fall to 0.4x in FY10, leaving plenty of room to gear up. M1 last undertook a capital management exercise in 2Q07 when its net gearing was 1.0x net debt/EBITDA, a capital structure M1 has described as ideal.
iPhone value. M1 had received a lot of interest for the iPhone implying pent-up demand despite SingTel’s de-facto exclusivity for more than year. M1 had about 10- 20K iPhone users on its network but we believe that growth will accelerate post the launch of the phone.
We view the iPhone as an excellent acquisition and retention tool and an ARPU stimulator through higher data usage. M1 concurred noting that the main value of the device was the higher ARPUs it generated and the fact that it would have faced an untenable situation without the phone. The iPhone is well-suited for its take 3 programme, where ARPUs are 1.15x higher than that of a normal postpaid user. While pricing has yet to be determined, M1 will not deviate too far from the subsidies provided by SingTel. We estimate that SingTel recovers the iPhone subsidies within a period of 6-14 months and believe that M1 would witness a similar payback period.
Cost cutting measures and competition. M1 attributed the 1.4% pts drop in EBITDA margins in part to seasonality. Over time and in a steady state environment, EBITDA margins would drift back up to the 44-46% of service revenue. The main areas to attack would be in the leased line cost as it completes its backhaul investment by end 09. Besides that, it would focus on cost initiatives by improving staff efficiency, expanding its call centre in Kuala Lumpur to handle 50% of the call traffic and improve its network efficiency.
Meanwhile, M1 has seen heavier competition in wireless broadband which caused its net adds to fall to 12K in 3Q from 15K in 2Q because of price discounting by StarHub. In order to retain its market share, it would have to match those promotional prices.
Valuation and recommendation
The session did not provide major revelation with much of the talking points addressed in the 3Q call and in previous discussion with M1. The only real new area explored was the roaming agreement with Vodafone. As a yield play, we continue to advocate M1 over StarHub as its earnings stream is more visible and secure. Moreover, it has the capacity to gear up and we have factored in a special dividend of 23.5 cts/share into our forecast. We maintain our earnings forecast, target price of S$2.07 (WACC: 9.5%, LT growth: 1%) and NEUTRAL call. Although we see a lack of catalysts, this is balanced out by its yield of 21.4% which is inclusive of the 23.5 cts special dividend, the most upside to NGNBN and the best exposure to wireless broadband.
TELCOs – DBS
Structural rise in competition?
• Our checks indicate rising competitive intensity in the sector, and we see this as a trend rather than exception next year.
• We lower M1’s FY10F earnings by 6%, now 2% below consensus. Our StarHub’s FY10F earnings are 5% below consensus. Given that M1 offers 7.3% yield with stable earnings prospects, investors may seek higher yield of atleast 9% from StarHub due to the challenges ahead. Downgrade StarHub to FV and M1 to HOLD
• For SingTel, its Indian associate Bharti retaliated with lower tariffs in the second week of October. We trimmed SingTel’s FY11F earnings by 3%, now 4% below consensus. Maintain HOLD for SingTel with lower TP of S$3.20.
Intense competition for market share in the post-paid mobile segment. Our shop visits indicate that all the players are offering up to 50% discount on the published mobile data rates, implying that ARPU may not have much upside, while network capex may rise significantly, as data traffic typically consumes manifold network capacity than voice traffic. M1 and StarHub, on top of the usual handset subsidy, are offering discount of S$100 to the customers who switch from other operators. Broadband tariffs are also under pressure, as consumers prefer to stay with low-end plans. This may adversely impact the margins of all the players in the industry, in our view.
Higher competition may be a trend, not an occasional spike. We see competitive intensity going up rather than coming down in 2010. SingTel’s EPL pricing of S$23/month (compared to StarHub’s min S$25) despite higher content cost vindicates our fear of aggressive customer acquisition targets. Recently, M1 secured iPhone deal, raised its FY09F capex by 20%, and is keen to secure broadband subscribers through National Broadband Network (NBN) next year. StarHub faces an uphill task of defending its mobile and broadband market share, in the face of possible pay TV market share decline next year, in our view.
No excitement in the sector and too early for bargain hunting. M1 trades at 7.3% yield with stable earnings prospects. In our view, investors may seek potentially higher yield from StarHub, at least 9% yield, given risk of mid-single digit earnings decline in the next two years before it stabilizes.
SingTel trades at 4.5% yield with mid-single digit growth prospects, over the next two years, which appear to be reasonable in our view.
M1 – DBS
Consistent strategy but sector woes
• Lower data pricing and discounts on mobile services are being offered in the market now.
• M1 may find it difficult to compete in the mobile and broadband segments, given rising competitive intensity in the sector. Our FY10F earnings lowered by 6% due to higher opex.
• M1 has outperformed STI by 8% since our upgrade on 22 Jun 09. Downgrade to HOLD with revised TP of S$1.95
Intense competition in the post-paid mobile segment. We observed that all the telcos are offering 50% discount on their published mobile data plans in order to encourage users to adopt data plans. As a result, ARPU may not rise much, while network capex may rise substantially, as data traffic typically consumes manifold network capacity than voice traffic. In addition, M1 and StarHub, on top of the usual handset subsidy, are offering discount of S$100 to the customers who switch from other operators. This may adversely impact the margins of the telcos.
Higher competition may be a trend, not an occasional spike. We see competitive intensity going up rather than coming down in 2010. SingTel’s EPL pricing of S$23/month (compared to StarHub’s min s$25) despite higher content cost vindicates our fear of aggressive customer acquisition targets. Recently, M1 secured iPhone deal and raised its FY09F capex by 20%, indicating an aggressive agenda ahead. StarHub faces an uphill task of defending its mobile and broadband market share, while realizing that pay TV market share is liklely to decline next year. Our FY10F earnings lowered by 6% due to higher opex. Our target price is S$1.95, still pegged to 12x average FY10F EPS. The stock trades at reasonable 7.3% yield for stable earnings prospects. With higher capex requirements, we see lower possibility of capital management in FY10F.