• 4th Telco to put more pressure on ARPUs
• Singtel our top pick
• Maintain NEUTRAL on sector

TPG and MyRepublic competing to become 4th Telco

As announced last month by Infocomm Media Development Authority of Singapore (IMDA), MyRepublic Ltd (MyRepublic) and TPG Telecom Pte Ltd (TPG), are now both pre-qualified to participate in the New Entrant Spectrum Auction (NESA), targeted to complete by end-CY16. Note that the reserved price for the set aside spectrum lots (two 900 MHz spectrum lots and eight 2.3 GHz spectrum lots) is S$35m. However, we believe this price will be much higher as both companies are expected to try to outbid each other at the NESA.

We believe TPG has deeper pockets and is more transparent as a listed company in Australia while MyRepublic already has a presence in Singapore as a fixed service provider. In either scenario, the fact is that there will be a 4th Telco in Singapore. In our view, without quality network coverage at the start, we expect the 4th Telco to compete aggressively via low-pricing strategy, which would exert even more pressure on the already declining mobile ARPUs of the incumbents.

Telecom stocks took a beating since 1 Sep

Since 1 Sep, the day when IMDA announced that three companies had submitted Expression of Interest (EOI) documents for 4th Telco spectrum license, share prices of the three telecom stocks have taken a beating. The weakness in share prices were exacerbated as U.S. treasury yields soared after Trump was elected as U.S. president on 8 Nov 16. Since 1 Sep, share prices of Singtel, Starhub and M1 have fallen 4.5%, 18.7% and 24.1% (8 Dec close), respectively.

In our view, we believe Starhub and M1 have already rerated to be fairly valued (based on impact of 4th Telco), as earnings impact and market share lossto 4th Telco will likely be progressive. That said, we expect Singtel’s earnings to stay resilient due to limited Singapore mobile business exposure and dominant position (i.e. enough scale to help mitigate new entrant impact). We forecast for mobile revenues (from Singapore) of Singtel, Starhub and M1 to register CAGR of -1.4%, - 2.3% and -3.1% between FY15 and FY21 (or FY22 for Singtel), respectively.

Maintain NEUTRAL with Singtel as sector top pick

On the back of an already competitive business landscape and weak economic outlook for Singapore, the entry of a 4th Telco will likely exert more pressures on the existing players. Hence, we maintain NEUTRAL on the Telecom sector. Even though share prices of M1 [HOLD; FV: S$2.08] and Starhub [HOLD; FV: S$3.05] have fallen significantly, given their substantial exposure to Singapore mobile market, we do not think the upsides are currently attractive. Within the sector, we reiterate Singtel [BUY; FV: S$4.27] as our top pick. We expect Singtel to be the least impacted given its limited exposure to mobile segment in Singapore, and like its growing presence in cyber security segment, and exposure to regional associates.

Source: OCBC Research - 9 Dec 2016