Category: SingTel
TELCO – CIMB
City Telecom pulls out of NGNBN NetCo Bid
A blow to Infinity
City Telecom (CTI) has ceased to be a member of the Infinity NGNBN Netco consortium, whom StarHub and MobileOne are also members. With CTI’s withdrawal, StarHub will be taking over the role of consortium leader. M1 will continue to play an active role and Qatar Investment Authority (QIA) has been tapped to replace City Telecom in the consortium. No reason was provided as to why CTI dropped out although we believe the direction and strategy of the bid could have prompted such a move. This comes soon before the winner of the bid is announced.
Who is City Telecom? Established in 1992, City Telecom (HK) is a provider of residential and corporate fixed network and international telecommunication services. It started off as an alternative IDD service provider in 1992, before obtaining a fixed line licence in 2000. In that same year, it set up its wholly own subsidiary, Hong Kong Broadband Networks (HKBN) which is a major fixed network service operator, providing the world’s fastest residential access, with speeds hitting up to 1Gbps.
Who is QIA? QIA was established on June 23, 2005 as the investment arm of the state of Qatar. The principal aim is the investment of surplus financial resources in regional and international markets, blue chip companies and projects.
Reduces Infinity’s chances
Key loss. CTI’s pullout caught us by surprise. With CTI’s pullout, we see less odds of Infinity winning the bid for NetCo as we find approximately 30% of the criteria of the NetCo RFP (25% from quality of network infrastructure and 5% of bidder’s track record and management expertise. See Figure 1 below.) being at risk with the loss of such a key partner as CTI. QIA, is in our view, more of a financial investor given limited experience in the telco space.
Prior to this announcement, we had already regarded the SingTel led OpenNet consortium as having the better odds of winning for three key reasons:
• proposition of rolling out 2 years before iN2015 vision would be welcomed,
• significantly lower cost of rollout from having a more extensive fibre network,
• likelihood of lower civil works disruption.
Extensive experience in rolling out broadband. CTI has extensive experience in rolling out broadband as it built up its network up from scratch to compete against the bigger boys of PCCW. Today, it standard product, offers much greater speed of 100 Mbps uplink and downlink versus the incumbent’s offering of 8 Mbps downlink and 1 Mbps uplink. More crucially, CTI’s experience in building the NBN in densely populated areas by using existing infrastructure such as bridges and drains while causing minimum disruption would have proven handy and would have been a key attraction of the Infinity-led consortium.
NetCo is mildly positive to SingTel. The much improved odds of securing the NetCo bid would be slightly positive for SingTel, in our view. This would negate them building an alternative network to rival the winning competitors on top of securing them the $750m grant to upgrade their existing network. Returns from the network should offset potential loss of revenue from lower revenue of leasing backhaul capacity to StarHub and M1.
Win or lose, NetCo is mildly positive for StarHub and M1. Win or lose, we believe StarHub stands to gain. If it wins, it gains three advantages, a) part ownership of the network, saving on rental costs for backhaul, b) grant of $750m, covers approximately 50% of entire capex and c) layering of income if multiple OpCos enter the frame. If Infinity loses, both M1 and StarHub would still benefit from lower leasing costs, access to commercial and residential homes and lower interconnect charges.
Valuation and recommendation
Maintain Neutral on the sector, and Neutral for all the telcos. The dogged determination of SingTel in pursuing market share gains overshadows the consumption growth and dividend stories and trains the spotlight on margin compression. SingTel’s diversified earnings base offers better downside protection with Singapore contributing about 30% of SingTel’s earnings vs. 100% of StarHub and M1. Between StarHub and M1, we prefer StarHub for its more diversified earnings base.
SingTel – DBS
iPhone and NBN
Story: We believe the iPhone launch on 22 Aug will not generate meaningful shake up in the market share as SingTel has priced it at a premium to the price in markets such as Hong Kong. We view the award of NetCo contract for National Broadband Network (NBN), expected in Aug-Sept 08 time frame, to be more significant.
Point: We highlight three key points for the sector.
(a) Margin recovery unlikely this year. Looking at current subsidies offered by StarHub and M1 on touch screen phones from Samsung and HTC, in anticipation of SingTel’s launch of iPhone, we believe that margin recovery would take time. Post-mobile number portability (MNP), we have not seen significant reduction in competitive intensity till now. Traditionally margins have always been lower in 4Q compared to the rest of the year due to festive promotions. This implies that, the earliest we can hope for margin recovery will be towards the beginning of 2009.
(b) NetCo award can have adverse impact on the whole sector. With the Netco award, market may focus on the fact that one of the two existing broadband networks can become redundant or obsolete due to NBN. With City Telecom’s exit from StarHub-led consortium, we have even higher conviction on SingTel-led consortium “OpenNet” winning the award due to its ability to upgrade SingTel’s existing network at lower costs. This implies that StarHub would be forced to run its existing network in direct competition with NBN. In the long run, even SingTel may see adverse impact on its broadband business (c.10% of group earnings) due to the regulated pricing environment.
(c) Capital management is the only silver lining in the sector. We understand that the magnitude of capex required by each player for NBN is quite limited as (i) capex spending would be spread over 2-3 years and (ii) each player has only 30% stake in the consortium. We have estimated annual capex spending by each player for NetCo layer to be around S$100m. We believe that M1 and StarHub can reduce their capital by 10% and 5% respectively with FY08 results. However, the likelihood of special dividends remains low as evident from their track record of preference for capital reduction.
Relevance: We prefer M1 to SingTel due to its attractive valuations and regular dividend yield of near 8%, which can be further enhanced by capital management. We think that M1 can easily meet FY08 street estimates, while SingTel may disappoint as management guidance of double-digit growth in earnings for associate is too bullish. StarHub is our least preferred stock due to its premium valuations of 14x FY08 earnings, which can only be justified for a company with double-digit earnings growth. We see slight decline in StarHub’s earnings this year and believe that large valuation gap between StarHub and M1 may no longer be justified.
SingTel – CS
1Q09 results – Solid core results, currencies and Telkomsel caused net profit weakness
● Mobile Number Portability did not have a material negative impact on the Singapore business, and revenue and EBITDA rose QoQ; we expect this recovery to continue into subsequent quarters. Optus’s contribution was very much in line with our forecasts.
● However, total contribution from associates fell by 9.9% QoQ and 10.7% YoY. This very weak result came partly as a result of S$ appreciation, but was predominantly due to the 24.4% collapse in Telkomsels net profit in the quarter to June.
● We have cut the PBT contribution from associates by 9.5% due to currency amendments and our recently-revised Telkomsel forecasts, and this feeds through to a 5.3% cut in earnings. However, our DCF-based SOTP and target price are unchanged.
● Singtel did not announce any further capital management initiatives; it is possible that management are waiting for the announcement of the winner of the NetCo and OpCo bids for
Singapores Next Generation Network (NGN). In the meantime, the balance sheet remains strong. Outperform rating maintained.
TELCO – CIMB
7-Eleven enters prepaid space
New MVNO player
7-Eleven has entered the prepaid market in Singapore by launching its mobile virtual network operator (MVNO) cards called 7-Connect, following similar successes in the US and Canada. The cards will be available in more than 400 7-Eleven stores in Singapore. Its partner is US-based MVNO Ztar Mobile and the service will ride on M1’s 3G network.
Who is Ztar Mobile? It is a mobile virtual network enabler (MVNE) offering wireless solutions that enables any party to provide private-brand wireless services to its own customers. It offers services to MVNOs such as billing and customer care, without any required investment in wireless infrastructure or expertise. It has partnered with leading wireless manufacturers and other handset manufacturers to deliver the first MVNE solution in the US.
What is on offer? 7-Connect offers users who sign up for S$30/month the following features :
• Free local voice calls on nights and weekends.
• Call tariffs of 15 cts/min for the first two minutes followed by 8 cts/min thereafter for all other hours.
• SMS rates at 5 cts/SMS for local SMS and 15 cts/SMS for global SMS.
• S$10 bonus for other features (SMS, IDD, etc)
• Fill-up cards for as low as S$18/month (free calls on nights and weekends not applicable here)
• Carry-forward minutes (minutes can be carried over to the next month) and free caller ID, voice mail, call waiting, conference waiting.
Comments
Not a significant threat. We do not foresee 7-Connect posing a threat to any of the incumbents because:
• Its tariffs are the same, if not higher than those of the incumbents, except for the free calls at nights and weekends if the user tops up S$30 as its costs are controlled by M1. In addition, the minimum S$30/month spend required for users to enjoy free calls on nights and weekends is above the prepaid ARPUs (S$16-22) generated by the three major telcos, limiting upside and take-up of the service, we believe.
• It does not offer special IDD rates, hence, not addressing the large migrant worker
market in Singapore made up mostly of high-ARPU users.
• 7-Connect sells only 3G SIMs, which limits its users to 3G handset owners. This is
likely to exclude a significant portion of the price-sensitive prepaid market. The small 3G prepaid market is reflected in the fact that only M1 offers 3G prepaid services, while StarHub and SingTel do not. Having said that, we gather that 95% of the handsets sold in Singapore are now 3G phones.
Hence, carving out a foothold will be difficult in a mature market like Singapore, what with competition in the prepaid segment already very intense. Low-cost set-up. 7-Connect appears to be keeping its costs low by using 7-Eleven to distribute, unlike the now-defunct Virgin Mobile which opened up its own outlets. The 7-Eleven brand is well-known but not for its phone services. 7-Evelen sells reload coupons for all the existing telcos and it remains to be seen if it will be pushing 7-Connect harder.
SingTel – DBS
Marked slowdown in the regional growth story
Story: Underlying net profit at S$865m was down 0.3% y-o-y and down 10% q-o-q, in line with our estimate of S$850- S$875m. However, it was 7% below the consensus estimate of S$929m.
Point: Following are the major highlights of the result. Pre-tax contribution from regional associates declined 11% yo- y to S$582m. While weak regional currencies were a major factor, weaker operating performance of Telkomsel (down 23% y-o-y due to intense competition), Globe (down 26% yo- y due to high inflation) and Warid (S$22m loss from network expansion) were other factors. Bharti and AIS performed in line with street estimates.
If not for exchange rate movement, pre-tax earnings from associates would have increased 6% y-o-y, but even then management guidance of double-digit growth in pre-tax contribution from associates appears too bullish to us. Current weakness in AUD is also something to worry about in 2QFY09.
Singapore EBITDA at S$523m, up 1.2% y-o-y was slightly above expectations while Australia EBITDA at A$494m, up 2.7% was slightly below expectations. Overall, these two markets contributed a combined EBITDA of S$1146m, up 2.6% y-o-y, inline with our expectations.
Relevance: Our FY09 earnings estimates are 4% below consensus estimates with street too bullish on regional contributions, which can potentially be downgraded with this set of result. Infact, we see downside risk to our earnings estimates, if regional currencies or AUD weaken against SGD. We maintain HOLD for SingTel with SOTP based target price of S$3.70. However, if we use current market prices (instead of target prices) of regional associates in our SOTP valuation, SingTel is worth S$3.35.