TELCOs – DBSV
3G spectrum sale as bargaining chip?
• Three lots of 3G spectrum on sale with three potential bidders.
• Theoretically a fourth operator can participate in the auction, practically no one should be interested.
• This could be a bargaining chip in the hands of SingTel.
• Prefer SingTel and M1 to StarHub.
Three lots of 3G spectrum on sale. The telecom regulator, IDA would be auctioning three lots of additional 3G spectrum in 1900-2100 MHz band , with reserve price of S$20m for each lot. Applicants wishing to secure the spectrum must submit offers by 4 October, with the auction starting on 15 November.
Theoretically a fourth operator can participate, practically, no one should be interested. We like to remind investors that new entrants in the broadband space, LGA and SuperInternet are retail service providers (RSPs), who do not own any infrastructure. 3G spectrum, on the other hand, is part of mobile infrastructure, which needs high upfront investments. RSPs are equivalent to mobile virtual network operators (MVNOs) who do not need additional spectrum, if cellular operators lease mobile infrastructure to them.
Bid price may exceed the reserve price if SingTel decides to bid for 2 lots. Incumbents wanted IDA to simply allocate one lot of 2x 5MHz to each operator. However, IDA disagreed and aims to secure higher price by allowing each operator to bid for up to two lots instead of just one lot. In the 2001 auction, each lot of 2x 15 MHz spectrum was allocated (without auction) to the 3 operators at S$100 million each. Recently, India recently concluded its own 3G auction that generated S$20 bn for the local government. While India is not a right comparison for Singapore, we believe 3G spectrum is worth more as data traffic is growing exponentially requiring more spectrum and capex. An aggressive SingTel may be willing to secure 2 lots of spectrum, spiking up the price. This could be a bargaining chip in the hands of SingTel with StarHub and M1 encroaching into SingTel’s traditional stronghold of SME and corporate broadband. StarHub and M1 could be impacted if bid price is higher than S$20m, especially StarHub with higher dividend commitments..
Prefer SingTel and M1 to StarHub. We prefer SingTel for an improving Bharti (1Q11 was the bottom for Bharti) and attractive valuations of 12.1x FY11F PER at over 10% discount to its historical average of 13.4x. We like M1 for its sustainable 6.5% dividend yield and as key beneficiary of National Broadband Network. For StarHub, we estimate that its group equity may turn negative in 2012F, if it continues with 20 cents DPS.
SingTel – CIMB
Eyeing Cable & Wireless?
Departure from emerging-market assets
Maintain Underperform. Citing bankers, the media has reported that SingTel is considering a bid for Cable & Wireless Worldwide, a global provider of corporate fixed voice and data services. The key surprise is that SingTel appears to be moving away from pursuing mobile assets in developing countries to fixed-line assets in developed markets, probably acknowledging the lack of suitable and sizeable targets. We are positive on this potential acquisition, given C&W’s strong 3-year earnings CAGR of 21% and attractive prospective P/Es of 10x and 8x. Also, SingTel can probably extract cost savings and exploit cross-selling potential between the two companies. C&W will give SingTel a global platform vs. its current regional one. C&W’s shareholding is fragmented, which makes a takeover less challenging, in our view. However, maintain UNDERPERFORM on SingTel with an unchanged SOP-based target price of S$3.09, in view of headwinds faced by its key units. No change to our earnings estimates.
The news
Reuters has reported that SingTel is considering a bid for C&W, citing the British newspaper, Independent. It said SingTel had contacted bankers in Asia and Europe to discuss the idea and is less than 10% of the way through the process. It cited a corporate adviser as saying that SingTel is in the early stages of its pursuit but a takeover attempt is possible.
C&W provides communication networks and services in the UK and globally. Its clients are large multinational companies, governments, carrier customers and resellers. It provides managed voice, data and IP-based services and applications across the UK, Asia Pacific, India, Middle East & Africa, Europe and North America.
Comments
A departure? The key surprise is that SingTel appears to be moving away from pursuing mobile assets in developing countries to fixed-line assets in developed markets. This news, if confirmed, is an acknowledgement of a lack of suitable and sizeable emerging-market telco assets that could make a significant difference to SingTel. With Bharti owning Zain Africa, which is present in large parts of the continent, we believe SingTel may be running out of emerging-market options.
Positive. We are positive on this possible acquisition given C&W’s attractive growth and valuations, and potential synergies. C&W boasts a 3-year earnings CAGR of 21%, based on Bloomberg consensus estimates. It trades at CY10 and CY11 core P/Es of 10x and 8x respectively, implying a PEG of only 0.5x. Consensus forecast for FY10 earnings is about ₤198m (S$410m) or 11% of SingTel’s core net profit.
Synergies. C&W’s operations are similar to SingTel’s IT & Engineering (spearheaded by subsidiaries NCS and SCS), corporate and carriage services. Acquiring C&W would provide SingTel with a global platform vs. its current regional business. We believe there should be cost-savings and cross-selling of services.
Fragmented shareholding and modest valuations. C&W’s shareholding is also fragmented, with the majority of its shares held by portfolio funds, which makes a takeover less challenging, in our view. We believe SingTel can easily fund the acquisition given C&W’s market capitalisation of ₤1.9bn (S$3.9bn or 11% of SingTel’s market cap) and SingTel’s cash of S$1.78bn as at Jun 10, and FCF of S$3bn p.a.
Valuation and recommendation
Maintain UNDERPERFORM on SingTel with an unchanged SOP-based target price of S$3.09, as this potential acquisition does not change our view on SingTel. We believe the stock will be depressed by margin pressure in Singapore, lackluster earnings at Bharti and potentially rising competition in Australia.
SingTel – CIMB
Eyeing Cable & Wireless?
Departure from emerging-market assets
Maintain Underperform. Citing bankers, the media has reported that SingTel is considering a bid for Cable & Wireless Worldwide, a global provider of corporate fixed voice and data services. The key surprise is that SingTel appears to be moving away from pursuing mobile assets in developing countries to fixed-line assets in developed markets, probably acknowledging the lack of suitable and sizeable targets. We are positive on this potential acquisition, given C&W’s strong 3-year earnings CAGR of 21% and attractive prospective P/Es of 10x and 8x. Also, SingTel can probably extract cost savings and exploit cross-selling potential between the two companies. C&W will give SingTel a global platform vs. its current regional one. C&W’s shareholding is fragmented, which makes a takeover less challenging, in our view. However, maintain UNDERPERFORM on SingTel with an unchanged SOP-based target price of S$3.09, in view of headwinds faced by its key units. No change to our earnings estimates.
The news
Reuters has reported that SingTel is considering a bid for C&W, citing the British newspaper, Independent. It said SingTel had contacted bankers in Asia and Europe to discuss the idea and is less than 10% of the way through the process. It cited a corporate adviser as saying that SingTel is in the early stages of its pursuit but a takeover attempt is possible.
C&W provides communication networks and services in the UK and globally. Its clients are large multinational companies, governments, carrier customers and resellers. It provides managed voice, data and IP-based services and applications across the UK, Asia Pacific, India, Middle East & Africa, Europe and North America.
Comments
A departure? The key surprise is that SingTel appears to be moving away from pursuing mobile assets in developing countries to fixed-line assets in developed markets. This news, if confirmed, is an acknowledgement of a lack of suitable and sizeable emerging-market telco assets that could make a significant difference to SingTel. With Bharti owning Zain Africa, which is present in large parts of the continent, we believe SingTel may be running out of emerging-market options.
Positive. We are positive on this possible acquisition given C&W’s attractive growth and valuations, and potential synergies. C&W boasts a 3-year earnings CAGR of 21%, based on Bloomberg consensus estimates. It trades at CY10 and CY11 core P/Es of 10x and 8x respectively, implying a PEG of only 0.5x. Consensus forecast for FY10 earnings is about ₤198m (S$410m) or 11% of SingTel’s core net profit.
Synergies. C&W’s operations are similar to SingTel’s IT & Engineering (spearheaded by subsidiaries NCS and SCS), corporate and carriage services. Acquiring C&W would provide SingTel with a global platform vs. its current regional business. We believe there should be cost-savings and cross-selling of services.
Fragmented shareholding and modest valuations. C&W’s shareholding is also fragmented, with the majority of its shares held by portfolio funds, which makes a takeover less challenging, in our view. We believe SingTel can easily fund the acquisition given C&W’s market capitalisation of ₤1.9bn (S$3.9bn or 11% of SingTel’s market cap) and SingTel’s cash of S$1.78bn as at Jun 10, and FCF of S$3bn p.a.
Valuation and recommendation
Maintain UNDERPERFORM on SingTel with an unchanged SOP-based target price of S$3.09, as this potential acquisition does not change our view on SingTel. We believe the stock will be depressed by margin pressure in Singapore, lackluster earnings at Bharti and potentially rising competition in Australia.
SPH – Kim Eng
Set for bumper profits
Event
• Robust demand for display and job ads during 9M10, as well as sizeable property development profits, appears to have set the Singapore Press Holdings (SPH) on course to report a record net profit for FY Aug10 when it announces its full‐year results, likely on 12 October. Though sales growth in the fourth quarter moderated somewhat, as reflected in the sequential decline in its page count, we expect higher consumer spending and a strong job market to sustain print advertising demand. Maintain BUY with a target price of $4.62.
Our View
• Display ad volume growth moderated in 4QFY Aug10 as the average page count for the Saturday edition of The Straits Times rose by just 13% YoY compared to +28% in the previous quarter. Sequentially this marked a 4% drop. However, we expect the advertising volume to pick up again in 1QFY Aug11 as year‐end festivities kick in.
• With the completion of Sky@Eleven in June, SPH is eyeing new projects. It recently put in the second‐highest bid of $650.9m for a mixed commercial and residential development site at Bedok. At $694
psf, the price seemed fair as it was close to the third and fourth bids.
• Another catalyst is the opening of the 60%‐owned Clementi Mall next January. Crowd‐pullers such as Fairprice Finest, Foodfare and the National Library Board have signed on as anchor tenants. We await an update on the retail tenancy mix and rental rates in the next 4‐6 months.
Action & Recommendation
Our final dividend forecast of 18 cents a share remains intact, implying a full‐year total yield of 6.1% (DPS of 25.3 cents). The core media business currently trades at an implied FY Aug11F PER of 15x, a slight discount to the Straits Times Index. Other long‐term catalysts are growth in consumer spending and possible spin‐off of its property division. Maintain BUY with a target price of $4.62.
TELCOs – BT
Door swings open for fourth mobile operator
IDA to auction off final 3G spectrum in November despite opposition from incumbents
Local authorities will go ahead with plans to auction off Singapore’s final third-generation (3G) mobile spectrum this November despite opposition from incumbent operators.
In doing so, the government is also keeping the door open for a fourth player to break the country’s decade-long telecommunications trinity.
This 3G spectrum, which has been left unused for the last nine years, is set to go under the hammer on Nov 15.
Three lots within the 1,900 to 2,100 MHz (megahertz) frequency range will be up for grabs this time round and the reserve price for these have been set at $20 million each.
These additional details were disclosed by the Infocomm Development Authority of Singapore (IDA) in a set of auction documents published on its website last Friday.
The move is envisioned to provide existing operators – Singapore Telecommunications, StarHub, and M1 – with additional cellular bandwidth to cope with the explosive demand in mobile broadband services in recent years.
IDA statistics show that some 5.5 million wireless broadband users are now using smart phones and mobile broadband sticks to surf on the go, a trend which places a growing strain on a telco’s cellular network.
In addition, the IDA previously said the auction could also pave the way for a fourth mobile operator to join the scene.
All three incumbents protested the auction when the idea was first floated in March this year.
Instead, they collectively mooted a non-competitive, ‘administrative allocation’ approach where the remaining 3G spectrum is apportioned to them instead.
‘An auction will be a more efficient, objective, and transparent approach for allocating scarce resources because it relies on market forces to allocate them to those who value them most,’ the IDA said in its defence last Friday.
‘This takes into account the fact that radio-frequency spectrum is a scarce and finite resource and that a market-based allocation approach, such as an auction, is more effective in ensuring spectrum optimisation by operators,’ it added.
This was the same route it took in 2001 when the 3G spectrum first went on sale here.
Four lots were to be parcelled off then but the auction was scrapped as it only garnered three bids in the end.
SingTel, StarHub, and M1 eventually paid the reserve price of $100 million each for their 3G licences in 2001. The fourth unclaimed band is the one that IDA is now looking to allot.
Under IDA’s latest auction rules, the three incumbent operators can only bid for a maximum of two spectrum lots in the November auction.
Interested bidders must submit their initial offers by Oct 4 and they must be backed by bank guarantees, the regulator said.
Other companies outside Singapore’s telco fraternity are welcome to throw their hats into the ring but the spectrum will only be allotted to firms with an established local presence.
However, the IDA is giving interested foreign companies some leeway.
‘It is not necessary for such an entity to have been established in order for a bidder to participate in the auction,’ the regulator said.
This gives a new player a time buffer of at least two months between tabling their initial bids and setting up a local subsidiary.
However, market watchers believe the chances of having a fourth operator are slim as the incumbents have entrenched customer bases and they can be expected to defend their turfs aggressively.
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.