• Competitive pressures a drag on earnings
• Maintain NEUTRAL on sector
• Singtel our only BUY

Only Singtel delivered in-line earnings for 2016

All three telecommunications service providers (telcos) reported weaker performances from their Singapore mobile segment as a result of intensifying competition (i.e. pressures on ARPU) and the increasing usage of over-the-top (OTT) services that led to lower usage revenue from traditional voice services, IDD and roaming services. Of the three telcos, only Singtel delivered in-line results as a result of its diversified earnings base while Starhub and M1 both missed given their significant exposure to Singapore’s mobile segment.

Singtel’s 9MFY17 core EBITDA fell 1.6% to S$3.7b, impacted by weaker Australia contributions but offset by stronger Singapore consumer performance as well as growth in contributions from regional mobile associates.

Starhub’s FY16 EBITDA slipped 3.2% to S$690.1m as revenue growth from broadband and enterprise fixed segments were offset by weakness from mobile and pay TV segments, drop in equipment sales as well as lower income grant.

For M1, FY16 EBITDA declined 8.7% to S$312.1m mainly due to lower handset sales and weaker mobile revenue (more material impact from OTT services), but offset by growth from its fixed services segment (i.e. fibre broadband).

Expects 11%-16% decline in ARPU over next five years

Looking ahead, we believe with TPG expected to launch mobile services in CY18, competition within Singapore’s mobile industry is set to intensify as incumbents will likely take actions to gain market share (i.e. to lock-in as many new customers on a two-year contract as possible) during this period.

Leveraging on Singapore’s Next Generation Nationwide Broadband Network (NGNBN), we also expect TPG to launch fibre broadband services even before the launch of mobile services as it builds up infrastructure for mobile network coverage. Consequently, we believe competition is set to heighten with TPG expected to compete by undercutting on pricing.

Based the FY16 results, 59% and 84% of Starhub and M1 revenues are derived from Singapore’s mobile segment. Hence, we see further earnings downside for both Starhub and M1, which currently may not be priced-in.

However, for Singtel, its effective exposure to Singapore’s mobile segment is only 5% and 4% of its 9MFY17 total revenue and EBITDA, respectively. Hence, we believe TPG’s entry has minimal impact on Singtel’s group earnings.

Reiterate BUY on Singtel

On aforementioned reasons, we further cut our assumptions for average revenue per user (ARPU) to decline by 11-16% over the next five years, and forecast for TPG to get mobile revenue market share of ~6% by CY21. Consequently, we downgrade M1 from HOLD to SELL with a lower FV of S$1.75, and maintain SELL on Starhub on lower FV of S$2.50.

However, we remain positive over Singtel’s long-term outlook given its growing presence in the cyber security segment, and exposure to regional mobile associates. Hence, we reiterate Singtel as our top pick within the sector with a BUY rating and FV of S$4.25. Maintain NEUTRAL on the Telecom sector.

Source: OCBC Research - 17 Mar 2017