Optus Goes Vivid

THE BUZZ

Singtel announced yesterday that its wholly- owned subsidiary, Optus Mobile Pty Ltd has signed an agreement to acquire all the issued shares in Vividwireless Group (VW) Ltd from Network Investments Holdings Pty. Ltd for a cash consideration of AUD230m. Vividwireless holds spectrum licenses in the 2.3GHz band and operates two wireless broadband businesses under the brandnames of ‘vividwireless’ and ‘unwired’. The completion of the transaction is subject to various conditions precedent including the reissue of the 2.3GHz spectrum licenses and approvals of the Australian Competition and Consumer Commission (ACCC) and Foreign Investment Review Board.

OUR TAKE

Zeroing in on the spectrum. We view the acquisition positively for Optus given the access to 98MHz under the 2.3Ghz band, a prized asset that will complement the 1800MHz band being used for its upcoming 4G (LTE) mobile rollout. Optus stands to gain immediately from an existing fixed wireless brand in the market and a ready base of customers to migrate, allowing for the up-selling and cross selling of bundled mobile and broadband packages. This should result in longer term ARPU accretion and stickiness. We believe Optus will be add value to VW than it would be possible under Seven Network as it is already supplying backhaul infrastructure to VW. The acquisition is well timed ahead of the move into next generation networks (NGN) where competition in the market is expected to intensify. There is strong potential for mobile and wireless broadband in Australia given the estimated broadband penetration of 49% in the country. Also, the vast terrain makes wireless broadband more a more cost effective solution to reach out to certain sections of the market which are not covered by fixed access.

Optus Goes Vivid

THE BUZZ

Singtel announced yesterday that its wholly- owned subsidiary, Optus Mobile Pty Ltd has signed an agreement to acquire all the issued shares in Vividwireless Group (VW) Ltd from Network Investments Holdings Pty. Ltd for a cash consideration of AUD230m. Vividwireless holds spectrum licenses in the 2.3GHz band and operates two wireless broadband businesses under the brandnames of ‘vividwireless’ and ‘unwired’. The completion of the transaction is subject to various conditions precedent including the reissue of the 2.3GHz spectrum licenses and approvals of the Australian Competition and Consumer Commission (ACCC) and Foreign Investment Review Board.

OUR TAKE

Zeroing in on the spectrum. We view the acquisition positively for Optus given the access to 98MHz under the 2.3Ghz band, a prized asset that will complement the 1800MHz band being used for its upcoming 4G (LTE) mobile rollout. Optus stands to gain immediately from an existing fixed wireless brand in the market and a ready base of customers to migrate, allowing for the up-selling and cross selling of bundled mobile and broadband packages. This should result in longer term ARPU accretion and stickiness. We believe Optus will be add value to VW than it would be possible under Seven Network as it is already supplying backhaul infrastructure to VW. The acquisition is well timed ahead of the move into next generation networks (NGN) where competition in the market is expected to intensify. There is strong potential for mobile and wireless broadband in Australia given the estimated broadband penetration of 49% in the country. Also, the vast terrain makes wireless broadband more a more cost effective solution to reach out to certain sections of the market which are not covered by fixed access.

Margins to remain under pressure

Downgrade to Hold. We expect SingTel’s EBITDA margin to remain under pressure for the next few quarters as the telco focuses on building its mobile customer base aggressively in Singapore. While it expects long-term benefits, the costs related to its build-up of mobile device content, as well as subscriber acquisition and retention, are expected to stay high, thus eating into margins.

3Q12 results below expectations. SingTel’s 3QFY Mar12 results fell short of expectations, reflecting higher acquisition and retention costs on a strong mix of smartphones and tablets in Singapore and weak associate contributions. However, we had expected this, following similar trends in M1’s results. The only question was the extent of the damage to margins, which was quite severe in 3QFY Mar12, down to 32.7% from 34.5% in the previous quarter and 35.9% a year ago.

Margin decline to continue. SingTel has seen its EBITDA margin decline for four quarters now. However, there is likely to be further downside in the short term. In particular, management mentioned that it will step up its level of aggression to acquire smartphone and fibre customers as NGNBN rollout progresses. In the long run, it hopes to reap the benefits of upselling customers on a wider range of services but the short-term, impact on margins will be negative.

Older and wiser on BPL but… The better news is SingTel is unlikely to want to be perceived as Mister Moneybags again when bidding for the 2013-16 seasons of the BPL starting in March 2012. According to Mr Allen Lew, SingTel’s Singapore CEO, it will be “a bit wiser on this”. However, cross-carriage notwithstanding, management still views BPL as a key piece of content. Depending on the dynamics with the content owner, SingTel may not have a choice but to bid aggressively.

Lack of catalysts. While we do not expect any positive catalysts in the near future, we also do not anticipate any event that could pull the rug from below SingTel’s earnings, which should remain fairly resilient. We value SingTel at $2.95, or 13x FY Mar12 earnings, similar to the region’s integrated telcos as well as its own historical average PER.

Lacking catalysts

We are little less optimistic on SingTel after its conference call today as the negatives pileup: rivalry in Australia’s mobile sector remains stiff and competition could intensify in the Philippines. We also see Australia’s fixed broadband competition heat up due to the NGNBN.

SingTel intends to retain its rights to carry the BPL but expects to be more rational with its bid. We downgrade SingTel to Neutral from Outperform, maintain our earnings estimates but tweak our SOP-based target price given its rising risks and CIMB’s rising optimism on the stock market.

What Happened

SingTel held a conference call after its 3QFY12 results. We are a little more negative on the stock as we think fixed broadband competition in Australia may intensify ahead of the introduction of the next generation broadband (NGNBN), similar to what happened in Singapore. Competition in the Australian mobile space remains intense with no sign of a let-up.

In Singapore, it expects to be more rational in bidding for the rights to the 2013-15 BPL seasons in 2H12. We believe SingTel intends to win the rights to this content, although it will be non-exclusive, given that is the anchor content for its pay TV.

We expect SingTel to continue to aggressively acquire both mobile and fixed broadband customers given its view to upsell them with content and applications down the road. It has a commanding 63% market share in fibre broadband.

What We Think

We think risks are rising for SingTel. Competition in Australia’s fixed broadband could intensify with the migration to NBN, similar to what happened in Singapore. StarHub’s broadband revenue and ARPU declined ahead of the launch of NGNBN as it jostled with SingTel for market share. In the Philippines, we think competition will be intense despite industry consolidation as Globe and PLDT slug it out for market share. Lastly, the Indian rupee remains weak.

What You Should Do

We advocate switching from SingTel to StarHub which we think will undertake a capital management in 2H12. We think SingTel’s earnings will likely be flattish in the coming quarters with growth in Singapore offset by competitive pressures in Australia, the Philippines and currency weakness in India.

Lacking catalysts

We are little less optimistic on SingTel after its conference call today as the negatives pileup: rivalry in Australia’s mobile sector remains stiff and competition could intensify in the Philippines. We also see Australia’s fixed broadband competition heat up due to the NGNBN.

SingTel intends to retain its rights to carry the BPL but expects to be more rational with its bid. We downgrade SingTel to Neutral from Outperform, maintain our earnings estimates but tweak our SOP-based target price given its rising risks and CIMB’s rising optimism on the stock market.

What Happened

SingTel held a conference call after its 3QFY12 results. We are a little more negative on the stock as we think fixed broadband competition in Australia may intensify ahead of the introduction of the next generation broadband (NGNBN), similar to what happened in Singapore. Competition in the Australian mobile space remains intense with no sign of a let-up.

In Singapore, it expects to be more rational in bidding for the rights to the 2013-15 BPL seasons in 2H12. We believe SingTel intends to win the rights to this content, although it will be non-exclusive, given that is the anchor content for its pay TV.

We expect SingTel to continue to aggressively acquire both mobile and fixed broadband customers given its view to upsell them with content and applications down the road. It has a commanding 63% market share in fibre broadband.

What We Think

We think risks are rising for SingTel. Competition in Australia’s fixed broadband could intensify with the migration to NBN, similar to what happened in Singapore. StarHub’s broadband revenue and ARPU declined ahead of the launch of NGNBN as it jostled with SingTel for market share. In the Philippines, we think competition will be intense despite industry consolidation as Globe and PLDT slug it out for market share. Lastly, the Indian rupee remains weak.

What You Should Do

We advocate switching from SingTel to StarHub which we think will undertake a capital management in 2H12. We think SingTel’s earnings will likely be flattish in the coming quarters with growth in Singapore offset by competitive pressures in Australia, the Philippines and currency weakness in India.