SINGAPORE (June 3): Phillip Capital is maintaining an “overweight” rating on Singapore’s telecom sector, while expecting Mobile and Pay-TV revenues to be weak in 2019 and stabilise in 2020.
The research house’s top picks are Singtel and NetLink NBN Trust.
Phillip Capital likes Singtel for its recovering regional associates and has upgraded its call on Singtel to “buy” with a target price of $3.66.
In a Monday report, analyst Alvin Chia says, “We are anticipating price hikes in India as Reliance Jio (Jio) seeks a return on their investments after capturing a similar revenue market share with Bharti Airtel (Airtel). Telkomsel is on track to recovery as competition is easing and we foresee growth outside Java. We think Globe will support associates recovery with its positive momentum on data monetisation.”
Chia is optimistic on the group’s digital business and expects EBITDA improvements in FY20, while forecasting EPS growth of 5% y-o-y.
Meanwhile, NetLink is favoured die to its dominance in the residential segment, which supports 1.33 million fibre end user connections. These connections have become the core of NetLink’s stable and predictable revenue stream.
“We believe new housing estates such as Punggol, Tengah and Sengkang will provide growth in the residential segment. As a result, we attributed a 10% growth rate in the number of connections. We expect Non-Building Address Points (NBAP) connections to gain traction and non-residential to be stable in FY20.” says Chia.
Phillip Capital has upgraded its recommendation on NetLink to “buy” with a target price of 93 cents.
On the other hand, StarHub, although not a sector favourite, is also rated “accumulate” with a target price of $1.62.
StarHub is facing headwinds from the mobile and pay-tv segment, but Chia believes that the enterprise segment helps provide some shelter.
“We expect the enterprise revenues to grow by 8% y-o-y on the back of higher managed services and cybersecurity,” says Chia, who is also observing the profitability of the group’s cyber-security arm, Ensign.
Overall, the mobile segment continues to face headwinds as voice direct calling (IDD) cannibalisation persist. Higher data allowances given to consumers prevent the telcos from monetising the increase in data usage as there is less excess data charges.
The enterprise segment, however, is expected to provide growth for telcos.
“There is still inertia after the resumption of smart nation initiatives. However, we think these activities should progressively gain traction,” adds Chia.
There increased demand for managed services across government, financial services, hospitality, transport, SMEs and healthcare. The enterprise is not spared from the decline of legacy services such as voice and IDD. These core carriage business typically command higher margins as compared to the ICT business.
Moreover, the Infocomm Media Development Authority (IMDA) has projected for 5G network to be commercialised by 2020, and indicating its desire for 5G to be a standalone network (minimum two nationwide), which means MNOs will have to rollout 5G network.
This translates to doubling the number of base stations for the rollout. 5G would also require more base stations because of the use of higher frequency bands. This will be positive for NetLink as the telcos will require its extensive fibre infrastructure for the connections in the new base stations.
TPG has launched its mobile trial in Dec 2018 for the first 20,000 subscribes, and later expanded to 200,000 subscribers in Mar 2019. There was positive feedback on network coverage and quality for outdoors, while indoor and underground coverage remains weak for now.
“We continue to believe that the commercial launch of TPG will have marginal impact to the incumbents in the near term. The one year delay of TPG’s commercial launch has limited its ability to capture customers as the novelty of a new MNO fades away,” says Chia.
As at 11.30am, shares in Singtel and StarHub are trading at $3.19 and $1.49, respectively, while units in NetLink are trading at 82 cents.
