SINGAPORE (Oct 16): DBS Group Research says M1 is taking a leaf out of Circles.Life’s playbook and undercutting the efforts of Singtel and StarHub to stabilise average revenue per user (ARPU) – even before the entry of fourth mobile operator TPG Telecom.
“While the market is concerned about TPG’s entry in late 2018, Circles.Life is quietly chipping away market share under the radar,” says DBS analyst Sachin Mittal in a Monday report.
The mobile virtual network operator (MVNO), which launched operations in mid-2016, utilises M1’s network. With Circles.Life’s revenue and subscribers included under M1’s mobile segment, the smallest of the three incumbent telcos has started to gain market share.
And now, M1 is looking to gain even more ground with the launch of its new mySIM plans in October, which offer more bundled data at a lower package price. “M1 is adjusting to the new paradigm of lower data pricing in the long term,” Mittal says.
On the other hand, Singtel and StarHub had earlier launched plans that offered more bundled data at higher package pricing, which Mittal believes are mostly focused on improving their revenues by pushing up ARPUs.
The analyst opines that M1’s undercutting of the competition is likely to cause near-term pain in the market with potential ARPU dilution, it could also end up gaining market share in the near term if Singtel and StarHub do not retaliate by introducing new plans of their own.
As the telco competition heats up, Mittal says cost escalations will weigh on M1 while StarHub will continue to face pressure in its pay TV and broadband business.
“[It is] hard to see bottoming out of earnings for M1 and StarHub,” Mittal adds.
As such, Mittal’s top pick for the sector is Singtel.
“Singtel’s core plus digital business is trading at only 5.6x FY18F EV/EBITDA versus 7x for M1, 9x for StarHub and 7.5x regional telco average,” Mittal says. “[The] 20-40% valuation discount versus peers is an opportunity to accumulate.”
In addition, Mittal says Singtel could pay special dividends of $600 million to $1.5 billion with its 1H18 results, taking total FY18F yield to 6.0-7.5%.
DBS has a “buy” call on Singtel with a target price of $4.30.
As at 4.58pm, shares in Singtel are trading 2 cents higher at $3.72, implying 10.3 times in FY18 earnings.
