SINGAPORE (Sept 14): Maybank Kim Eng Research is initiating coverage on the Singapore telecommunications sector with a “negative” rating, backed by its belief that the market has not fully priced in the impending entry of TPG Telecom.
“We believe consensus forecasts that currently show slow erosion in margins during a period of theoretically heightened competition do not factor in higher subsidies or a price war,” says Maybank analyst Luis Hilado in a Wednesday report.
Taking into account acquisition and retention subsidies, Maybank says its FY18 estimated EBITDA and core profit forecasts for the three incumbent telcos – SingTel, StarHub, and M1 – are “significantly lower” than consensus.
“Share price underperformance is indicative of fear partly being priced in for TPG Telecom’s future entry but there are no foregone conclusions until the actual launch and promotions are unveiled,” Hilado says.
TPG is expected to begin its mobile operations here in 2018, after beating MyRepublic in December last year to emerge victorious in the race to become Singapore's fourth mobile operator.
See: TPG Telecom wins race to become Singapore’s fourth telco
In the midst of the potential war in the retail segment, Maybank says SingTel, StarHub, and M1 have already turned their sights to the enterprise and government market segments.
“SmartNation initiatives and increasing demand for efficiency enhancing enterprise solutions may provide medium-term reprieve for the sector, which is more positive than what we currently forecast,” Hilado says.
While SingTel is the favourite in the race in these segments due to its larger capex as well as headstart in relationships and network, Hildao says StarHub and M1’s low base means they have more to gain than lose.
Maybank on Wednesday also initiated coverage on all three incumbent telcos. SingTel is the only one with a “hold” rating, while StarHub and M1 receive “sell” calls.
“SingTel’s geographically-diversified but telco-focussed portfolio should insulate it from Singapore-centric risks,” says Hilado.
However, the analyst warns that TPG’s entry in Australia is likely to see intensified competition down under, even as India remains a hot bed of competition.
Maybank has a target price of $3.83 on SingTel, implying an upside of 4.6% from its current share price of $3.66 as at 2.30pm.
The research house believes StarHub’s share price is headed even lower, despite already fallen 7.8% year-to-date.
“StarHub’s wireless and pay TV businesses are under siege from a new entrant for the former and piracy and changing viewing habits for the latter,” Hilado says.
“Meanwhile, pay TV is seeing erosion due to competition and content piracy thanks to the pervasiveness and quality of fixed broadband in Singapore,” he adds.
Maybank has a target price of $2.17 on StarHub, implying a downside of 16.2% from its current share price of $2.59 as at 2.30pm.
“We believe margin pressure from subsidies and competition is not fully priced in, despite the 12-month underperformance,” Hilado says.
The analyst is forecasting a “painful transition period” for M1 into the fixed broadband and enterprise segment as it is the most exposed to Singapore’s wireless competition risk.
“[M1’s] share price has de-rated but there is reason to believe there is still downside from here,” Hilado says.
Maybank has a target price of $1.59 on M1, implying a downside of 11.2% from its current share price of $1.79 as at 2.30pm.
While M1 is likely to use the upcoming release of new smartphones such as Apple’s iPhone X and iPhone 8 to accelerate the recontracting of postpaid subscribers to new 2-year contracts, Hilado says this is likely to come at the cost of unprecedented, elevated subsidies and depressed profits for the next two years.
“Based on our forecasts, if the three stocks traded down to our target prices they would be showing FY18E and FY19E P/Es of 17.2x and 18.4x for SingTel, 20.5x and 16.6x for StarHub, and 20.4x and 17.9x for M1,” he adds.
