• Sector headwinds unabating
• What the VGO is…and is not
• Singtel and NLT NBN preferred

Challenges at Every Turn

Over the course of 2018, the broad segments in which the 3 incumbent telecommunications service providers (telcos) operate in have and will probably continue to see notable challenges moving forward, albeit in varying degrees. In the mobile space, local post-paid ARPUs should continue to soften further in the face of TPG Telecom’s entry, with early evidence, in our opinion, coming from StarHub’s latest new SIMonly plans.

In the Pay-TV segment, the merits of operating on a variable cost model have been surfaced for some time now, but there does not seem to be sufficient consensus across the sector to bring content providers to the table. Lastly, while the enterprise segment appears to be the bright spark in terms of prospects, we are well aware that this comes at the expense of margins, a trade-off that all 3 telcos have come to accept in order to pursue growth.

Ongoing Corporate Action

One key highlight this year has been the preconditional voluntary general offer (VGO) announced by Keppel Corporation Limited and Singapore Press Holdings Limited for M1, at a cash offer of S$2.06 per share. In our opinion, the positive sentiment from this served to catalyze a spurt in StarHub’s share price, as the company is seen by many to be a closer peer to M1 (vs. Singtel).

We choose to remain somewhat cautious, as (a) there does not appear to be any similar offer for StarHub in the near-term, and (b) there is no indication of any fundamental change in the industry’s dynamics arising from the ongoing VGO.

How to Approach the TPG Telecom Question?

Broadly, we think that there are two ways to approach this. Firstly, we would prefer sticking with Singtel [BUY; FV: S$3.95] among the three telcos, given its geographical diversification. Looking into the dividend yield spread among all 3 telcos in the next FY, we believe Singtel presents the best risk-reward proposition.

Secondly, we believe investors could also consider gaining exposure to NetLink NBN Trust (NLT NBN) [BUY; FV: S$0.90]. In our opinion, the near-term growth path for NLT NBN across the residential/non-residential segments remains clear, while also well-leveraged to the Smart Nation initiatives being rolled out in Singapore.

Crucially, we believe that NLT NBN’s business model is resilient and less susceptible to the vicissitudes of the financial markets, especially in the late stage of the cycle. All considered, we maintain our NEUTRAL rating on the Telecom sector.

Source: OCBC Research - 10 Dec 2018