• Challenging outlook for mobile segment
• MyRepublic wants to be the next MVNO
• Singtel our preferred telco

All Three Telcos Reported Weaker 2QCY17 Earnings

All three telecommunications service providers (telcos) reported weaker performances as mobile segment continues to be impacted by intense competition (i.e. pressures on ARPU or average revenue per user), coupled with the increasing adoption of over-the-top (OTT) services that led to lower usage revenue from traditional voice services, IDD and roaming services. Despite lower bottom-line, all three telcos reported inline results for 2QCY17.

Singtel’s 1QFY18 core NPAT fell 3.5% to S$910m, largely impacted by aggressive competition by new entrant in India but offset by higher contribution from its Indonesia associate, Telkomsel. However, EBITDA improved 2.7% YoY to S$1.3b on the back of stronger Australia contributions but offset by weaker Singapore consumer performance.

Starhub’s 1H17 EBITDA slipped 9.2% YoY to S$341.0m as revenue growth from enterprise fixed and sales of equipment were offset by mobile, pay TV and broadband segments, as well as lower NBN grant. For M1, 1H17 EBITDA declined 7.8% YoY to S$152.4m, mainly due to weaker mobile revenue and higher operating expenses due to higher handset sales and higher fixed services revenue.

Expects 14%-20% Fall in Mobile ARPU Over Next Five Years

Looking ahead, competition within Singapore mobile segment is set to intensify with the impending entry of TPG, coupled with the aggressive market campaign by mobile virtual network operator (MVNO), Circles.Life. In addition, local fibre broadband operator MyRepublic announced back in Jul 17 that it plans to launch mobile services in Singapore likely in Oct 17 offering generous mobile data. The intensifying competition is evident when both Starhub and M1 recently launched aggressive campaigns targeted at data-hungry customers by offering plans with unlimited data allowances.

In our view, both telcos are likely taking actions to try to gain or at least retain their market (i.e. to lock-in as many new customers on new contracts as possible) before more players enter the space.

Based on the 1H17 results, 55% of Starhub operating revenue and 88% M1 revenues are derived from Singapore’s mobile segment. Hence, the increasing competitive landscape will impact them more significantly than Singtel, which only has an effective exposure to Singapore’s mobile segment of 4% of its 1QFY18 total revenue.

Reiterate BUY on Singtel

On aforementioned reasons, we cut our ARPU assumptions, projecting a decline of 14-20% over the next five years, and forecast for TPG to get mobile revenue market share of ~6% by CY21. However, with the recent steep correction in its share price, we upgrade M1 from SELL to HOLD even as we lower our FV from S$1.75 to S$1.65.

For Starhub, on weaker mobile earnings and pending further clarity over the ramp up of its enterprise business, we maintain SELL on lower S$2.30 FV (prev: S$2.40).

We remain positive on Singtel’s long-term outlook given its growing presence in the digital space – cyber security, data analytics and digital marketing. Hence, reiterate Singtel as our sector top pick with a BUY rating but lower FV of S$4.19. Maintain NEUTRAL on the Telecom sector.

Source: OCBC Research - 11 Sept 2017