Category: SingTel
SingTel – UOBKH
Big But Valuation Unattractive
Singapore – Dominance in corporate data eroded. SingTel dominance in corporate data services, which accounted for 25.6% of revenue from Singapore operations, will be challenged due to open access provided by Next Gen Nationwide Broadband Network (NGNBN). NGNBN provides superior performance with speed of up to 1Gbps. We believe corporate customers will be enticed by NGNBN-based services, which are likely to be more competitively priced as wholesale prices from NGNBN are fixed and transparent. The government, for example, has already decided to utilise NGNBN for a substantial portion of its requirement for telecoms services.
Australia – Optus could benefit from structural changes. The Rudd administration plans to set up a National Broadband Network (NBN) providing broadband speed of up to 100Mbps for 90% of Australians and structurally separate Telstra's wholesale network and consumer businesses. However, the government needs Telstra's cooperation and passive infrastructure to reduce the hefty cost of rolling out NBN. There is uncertainty over whether Telstra could solicit concessions from the government by cooperating on NBN. Legislative processes to reform regulations could also be protracted.
Regional mobile associates – facing headwinds. Bharti Airtel faces intense competition in India, which is expected to persist due to more new entrants, such as Telenor's Unicor and Etisalat's STEL. The impending acquisition of Zain Africa is also expensive at EV/EBITDA of 9.2x and is funded by huge additional borrowings of US$8.3b. Telkomsel faces slower growth in Indonesia while competitors Indosat and XL Axiata have been revitalised after change of controlling shareholders and revamp of management teams.
Downgrade to HOLD. We cut our earnings forecast for FY11 and FY12 by 1.9% and 3.9% respectively due to fluctuations in exchange rates and lower contributions from Bharti Airtel. We value SingTel at S$3.06 based on sum-of-the-parts, thus providing limited upside. We estimate SingTel's FY11 free cash flow yield at 6.6%, lower than 11.1% for M1 and 9.3% for StarHub. Our preferred picks for the sector are M1 and StarHub. Downgrade from BUY to HOLD. Entry price is S$2.55.
TELCOs – CIMB
1Q10 results preview
• Maintain UNDERWEIGHT. We maintain our UNDERWEIGHT stance as we do not expect any positive surprises in the upcoming 1Q10 results. We also remain concerned given the rise in content cost in the short-term, the pressure on broadband ARPUs and escalating subsidies from strong smartphone take-up. Our top pick in the sector remains M1 (TB, TP: S$2.26) as it would have the most capacity for capital management, the biggest upside from NGNBN and the most to gain from the recent content carry regulation. We retain our UNDERPERFORM recommendation on SingTel (TP: S$3.30) and StarHub (TP: S$2.14).
• No real shocks in 1Q. Competition stayed fairly benign across the major product groups, in our view. While 1Q service revenue typically declines, we believe that 1Q10 service revenue was flattish due to the improving economy, which powered higher usage and roaming, coupled with the increasing take-up of wireless broadband. However, we believe that overall revenue would have grown on the back of a full quarter’s worth of iPhone sales. EBITDA margins should fall, in our view, due to iPhone subsidies, especially for StarHub and M1.
• Expectations for operators. We estimate M1’s revenue rose by 2-3% qoq, helped by a full quarter’s worth of iPhone sales, the recovering economy and the increasing take-up of wireless broadband. While 1Q usually sees less marketing and acquisition costs, we think that the full quarter’s worth of iPhone subsidies would have negated that impact. As a consequence, we think that EBITDA margins dropped by 1-2% pts on a qoq basis, leading to a core net profit decline of 0-6%. M1 is scheduled to announce its 1Q10 results this Friday, 16 Apr. For StarHub, we think it will report revenue growth of 2-3% on a qoq basis, aided by the iPhone launch and the return of take-up for its more discretionary services. As a result, we think that a full quarter’s worth of iPhone subsidies would have caused EBITDA margins to range between flattish growth to a 0.5% pts drop, leading to a core net profit fall of 2-7% on a qoq basis. StarHub will announce its results on 6 May 2010.
• A fourth entrant? We view the likelihood of a fourth entrant as slim, following the proposed release of more 3G spectrum, because i) Singapore is a small and mature market, and ii) the new entrant would need deep pockets to build up a nationwide network, especially in-building coverage.
• OpCo progress running on time. Based on our recent meeting with NucleusConnect (NC), we gather that its rollout is progressing smoothly and on time. It is ready to launch its two central offices and the interoperability lab next month. It is seeing some fairly strong expressions of interest from retail service providers (RSPs) although it expects only a dozen or so to sign up. While no official confirmation has been given, NC expects a second OpCo to be constructed by SingTel, which is in line with our view. NC is anticipated to break even at the cashflow level only by 2015 or 2016.
TELCOs – BT
Fourth mobile operator may get a call-up
IDA may free up remaining 3G spectrum and pave way for new player, says consultation paper
Singapore’s telco scene could add a splash of colour beyond the current red, green and orange if the Republic’s telecommunications regulator goes ahead with a plan to free up its remaining third-generation (3G) cellular spectrum.
The Infocomm Development Authority of Singapore (IDA) is considering parcelling out the final lot of a 3G spectrum which has been left unused for the last nine years.
The move is envisioned to boost cellular bandwidth for the three incumbent operators – Singapore Telecommunications, StarHub and MobileOne – to provide mobile broadband services. At the same time, it could allow a fourth operator to join the trio in providing high-speed mobile services to local users.
‘To meet mobile operators’ increased demand for frequency spectrum so as to enhance their 3G system, and also to open the door for a fourth 3G operator, IDA would like to make available the remaining spectrum in the 3G Band,’ the regulator said in a consultation paper on its website.
This spectrum falls within the 1900 to 2100 Mhz (megahertz) range, the band which is currently used by telcos to offer 3G services such as mobile broadband and video calling.
Four lots within this frequency range were initially put up for auction in March 2001. However, these did not go under the hammer as IDA received offers only from the three local operators.
SingTel, StarHub and M1 eventually paid the reserve price of $100 million each for their 3G licence and the fourth lot was left unclaimed.
However, with the explosive adoption of mobile broadband services in recent years, IDA said it has recently received requests from telecom industry players to release the remaining spectrum.
‘Based on IDA’s statistics, between September 2008 and September 2009, 3G subscriptions grew by over 25 per cent while High-Speed Packet Access (HSPA) subscriptions grew by 240 per cent,’ it said.
HSPA, commonly referred to as 3.5G, is the technology being used to power mobile Web surfing on newfangled smart phones. All three operators also provide token-like devices called HSPA modems that can be connected to laptops to enjoy broadband connectivity on the go.
According to IDA’s latest figures, 3G subscribers currently account for close to half of Singapore’s sizeable base of 6.9 million cellphone users.
‘IDA believes that demand for 3G services will continue to grow steadily as more consumers upgrade from 2G to 3G services and take up mobile broadband services,’ it said.
‘To meet this growing consumption, the incumbent mobile operators will need to increase the capacity of their 3G networks. On the other hand, IDA cannot foreclose the possibility that the growing demand for 3G services may also present a viable business case for another operator to enter the 3G market in Singapore,’ the regulator added.
Singapore did have a fourth operator once in 2002 in the form of Virgin Mobile, a joint venture between SingTel and Richard Branson’s Virgin Group. However, it failed to make a dent in the market and the company pulled out within a year.
IDA is currently seeking views from the telecom industry and the public on its proposal. Feedback must be submitted by April 26.
SingTel – CIMB
Bharti’s expensive growth
Third time lucky
Maintain UNDERPERFORM on SingTel. We believe Bharti’s recent acquisition of Zain Africa is pricey and earnings-dilutive for SingTel. At about 8x CY10 EV/EBITDA, this is a sharp premium to Indonesian telco valuations of 5-6x, the closest proxies in our coverage universe. We estimate that SingTel’s FY11-13 core net profit would be diluted by 0.5-4%. In addition, risks of operating in Africa are higher than in Indonesia. We maintain our sum-of-the-parts target price of S$3.30 for SingTel on the back of anticipated earnings dilution, and the premium valuations paid. Key de-rating catalysts are an upcoming 3G spectrum auction in India, higher content costs in Singapore with the telecasting of Barclays Premier League from Aug 10 and potentially higher competition in Australia, in our assessment.
The news
After failing to clinch controlling stakes in MTN twice, Bharti has finally succeeded in acquiring a large African asset through Zain Africa for US$9bn in cash for the latter’s equity. About US$8.3bn will be paid upon closing and US$0.7bn one year from closing. Bharti Airtel will assume US$1.7bn of consolidated debt. Zain Africa has controlling stakes in mobile operators in 15 African nations (Figure 1). This acquisition will expand Bharti’s presence from the three countries (Bangladesh, India and Sri Lanka) it currently operates in.
Nigeria is the largest contributor. Four countries – Nigeria, Zambia, Gabon and Tanzania − contribute 68% of Zain Africa’s EBITDA with Nigeria being a distant first with 38% contribution.
Comments
Expensive. We believe the purchase price is high, at 9.2x annualised CY09 and 8x CY10 EV/EBITDA, assuming Zain’s EBITDA grows by 15% in CY10. This is high relative to the risks and income levels of the countries Zain operates in. Valuations are above those of Indonesian telcos, which are the closest proxies in our universe, valued at 5-6x EV/EBITDA, and taking into account the premium paid for control of the group.
While Zain Africa’s mobile penetration is low, this has to be seen against the income levels in the countries Zain is present in. The average population-weighted penetration rate of the countries it operates in is 35%. While this is substantially lower than Indonesia’s 82% SIM penetration and 46% user penetration, the average population weighted PPP-adjusted GDP per capita where Zain Africa operates in is US$1,500. This is much less than Indonesia’s US$4,149 (according to IMF).
Risks. The risks of investing in Africa include political instability, poverty, potentially higher taxes/levies and more mobile licences being issued. However, the population weighted GDP growth expected for FY10 is a fairly robust 5.8%
SingTel – BT
SingTel-linked cable system completed
Unity Cable, a US$300 million link between Japan and the US, will help meet demand for bandwidth by businesses and consumers
SUBMARINE cable capacity in the region got a major boost yesterday with the completion of a US$300 million link between Japan and the United States.
The 9,620km Unity Cable, which took almost two years to complete, is funded by a consortium of six members – Singapore Telecom and its Indian associate Bharti Airtel, Global Transit, PacNet, Japanese telco KDDI and Internet giant Google.
After extensive testing, the cable is ready for service, the companies said in a joint statement yesterday.
The system is capable of transferring data at 4.8 Tbps (terabits per second) between the US and Asia. It will help meet explosive demand for bandwidth by businesses and consumers as regional Internet penetration soars.
It also provides an alternative path for diverting Internet traffic should other submarine cable systems be disrupted.
Telcos worldwide have stepped up sub-sea investments after the 2006 Taiwanese earthquakes severed major submarine cable links with the US and slowed Web traffic in the region to a crawl.
Besides Unity Cable, SingTel is involved in a US$400 million submarine cable project within Asia.
The 8,300 km system, called the Southeast Asia Japan Cable (SJC), will initially link Singapore, Indonesia, the Philippines, Hong Kong and Japan. It is expected to be operational by 2012.
The SJC is designed to carry data at breakneck speeds of 17 Tbps, claimed and it touted to be the highest capacity system ever built.