The telecommunications industry has always been a competitive one. Yet, in the past two years, there have been several consolidations, collaborations and joint ventures in the sector which has been seen in many markets including Singapore.
Ranjan Sharma, Asean TMT analyst for JP Morgan Securities Singapore, explains regulators of the telco playing field take into account three mandates: Affordability of service, availability of service and quality of service.
Regulators have been slowly levelling the telco playing field since 2019 as they welcome more consolidations, partnerships and JVs. This way, telcos can keep a low capex, low-cost base and improve their industry economics. This, in turn, has led to a more conducive investment landscape within the industry although this sort of collaboration and consolidation is likely to vary from country to country.
For instance, the 5G launch earlier this year that saw StarHub and M1 enter into a JV to bid for the rights to operate 5G networks across Singapore which the duo eventually won.
“The telcos’ revenue potential remains the same [even after a JV]. But with this, they have managed to cut industry capex by half for 5G,” says Sharma.
On top of that, StarHub had acquired a 50.1% stake in the Singapore broadband business of local competitor MyRepublic. StarHub’s total investment could hit as high as $162.8 million and it has even agreed to help MyRepublic refinance $74.2 million of debt for a period of three years.
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On the other hand, with MyRepublic Broadband’s 6% market share of Singapore’s broadband market, StarHub would have expanded its market presence to 40% following this transaction. Upon completion of the acquisition, MyRepublic Broadband Singapore will be a StarHub subsidiary.
This deal will also benefit both parties as MyRepublic’s broadband customer base will stand to gain access to enhanced offerings from StarHub’s consumer and enterprise business groups, including the growing suite of products and services offering connectivity, overthe-top (OTT) content, cloud gaming and other experiences.
Indeed, analysts view the deal as a game-changer. “The deal marks the first consolidation of its kind in over a decade, and is in line with management’s narrative on M&A,” says RHB Group Research, which is overall positive on the acquisition as it would strengthen StarHub’s position in the fibre broadband market, and unlock scale and synergies via joint go-to-market opportunities, wholesale offerings and cost savings.
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DBS Group Research analyst Sachin Mittal notes that although acquisition is small, it will be accretive and help StarHub boost its earnings to enter a sustainable growth territory in FY2022 while StarHub’s enterprise business also continues to grow.
Meanwhile, in another bid to increase value, StarHub also recently acquired a 60% stake in Hong Kong-listed HKBN’s subsidiary HKBN JOS in Singapore and Malaysia for $15 million. HKBN JOS (Singapore) and HKBN JOS (Malaysia) would contribute 14% of StarHub’s overall enterprise business revenue for the same period.
“Our enterprise business has been achieving strong double-digit year-on-year growth, as we empower our customers’ transformation efforts with our cybersecurity, regional ICT and network solutions. We intend to accelerate our enterprise growth, by deepening our capabilities in Singapore as well as extending these enterprise digital services capabilities across the region,” says StarHub CEO Nikhil Eapen.
The acquisition of HKBN JOS (Singapore) and HKBN JOS (Malaysia) should complement Strateq, an earlier acquisition by StarHub. This acquisition will also see StarHub form a closer relationship with HKBN, which could result in business opportunities for both companies in the provision of bundled connectivity and ICT services.
With the move, StarHub has also launched a five-year strategic transformation and growth programme. Dubbed DARE+, StarHub has laid out its ambition to change from a telco to a company that connects digital lives for customers. DARE+ doubles down on digital across everything StarHub does, accelerating value creation, realising growth without frontiers and delivering an endless continuum of experiences that enrich customers’ lives.
With DARE+, StarHub intends to achieve sustainable revenue growth and potential growth in dividends, with superior product margins from the continued introduction of new 5G products and solutions, further operating cost savings through digitalisation and migration from legacy systems, and progressive declines in fixed cost through sustained evolution of operating models. StarHub is targeting $280 million in cost savings plus $220 million in gross profit growth cumulatively between FY2022 and FY2026.
Unlocking value
Even as StarHub invests more to increase value, rival Singapore Telecommunications (Singtel) is divesting to unlock value for shareholders, as the group embarks on a strategic reset to reverse lacklustre earnings in recent years.
On Oct 1, Singtel announced plans to sell a 70% stake in Australia Tower Network (ATN), which holds its Australia subsidiary Optus’ tower infrastructure, for A$1.9 billion ($1.8 billion). The buyer is AustralianSuper, the largest Australian superannuation and pension fund. The transaction involves 2,312 mobile network towers and rooftop sites and values ATN at an enterprise value of approximately A$2.3 billion ($2.23 billion), representing FY2021 pro forma EV/Ebitda transaction multiple of 38 times. This is significantly above telco multiples, reflecting the high quality of the assets and tenants.
“From our telecom towers to our data centres, it is imperative that we restructure our assets and re-organise our business to better fund, improve and grow our digital infrastructure. Not only will this secure our place in the digital economy, it will also allow us to help keep our communities supported and economies up and running,” says Singtel’s CEO Yuen Kuan Moon.
Besides its 30% remaining stake, Optus will be keeping a long-term lease agreement of 20 years with ATN, which will then be managed by AustralianSuper as part of the largest independent tower company. Optus will also be the anchor tenant on 565 new build-to-suit towers to be built over the next three years, which will form an integral part of its 5G network.
Optus CEO Kelly Bayer Rosmarin declines to disclose the lease Optus pays to AustralianSuper other than says it is on “very good commercial terms”. She points out that with proceeds of A$1.9 billion from the sale, Optus can then reinvest in its “active infrastructure and equipment and differentiation”.
Singtel too has formed some partnerships to increase its value, within the data centre space. Singtel has signed an MOU with Gulf Energy — Thailand’s leading power and infrastructure company — to form a partnership to build and develop data centres across the country. The venture is a bet on the growing sophistication of Thailand’s economy, where 25% of the GDP is seen to come from the digital economy come 2027.
Singtel believes it is on the way to building an “extremely high quality” portfolio of data centre assets across the region, be it on its own or with partners “who actually see value in this type of portfolio,” says Singtel’s CFO Arthur Lang. “At this point in time, our first and foremost objective is to unlock value for our shareholders,” he notes.
Outlook for telcos
While 2021 may not be the year the telcos recovered strongly, both operators have shown promising signs of recovery and analysts are positive of their prospects in the near- to mid-term.
To recap, StarHub’s latest 3QFY2021 ended September results saw earnings (excluding payouts from the Jobs Support Scheme) increase by 5.1% y-o-y to $40.0 million, while revenue rose 5.6% y-o-y to $517.2 million.
“We continue to see top- and bottom-line growth in 3QFY2021, following the strong numbers recorded [in] the previous quarter. This reflects our differentiated strategy to drive enriching digital experiences for our consumers across mobile, broadband and entertainment, coupled with our focus on cybersecurity and ICT as key drivers of our enterprise business,” says Eapen.
Meanwhile, Singtel reported earnings of $954 million for its 1HFY2022 ended September, double from the same period a year ago, driven by better showing from its regional associates and improvements in the operating environment. Specifically, Singtel’s associate in India Bharti, has shown signs of a stronger turnaround after being weighed down for years by stiff competition and other market-specific factors. The stronger bottom line was also because of the absence of one-off hits taken this time last year.
Revenue in the same period was up 3% y-o-y to $7.65 billion, led by higher mobile revenue in Australia and also better showing by its ICT subsidiary NCS. The group also declared an interim dividend of 4.5 cents, compared to 5.1 cents last year.
“Despite continued Covid-19 uncertainty and structural challenges in the industry, we’ve entered an improved period of recovery that’s seen business activity return,” says Yuen.
To that end, CGS-CIMB Research is keeping an “overweight” rating on the Singapore telco sector, while having Singtel as its top sector pick, while also highlighting StarHub and Netlink NBN Trust with “add” recommendations for all three counters.
DBS Group Research’s Sachin Mittal sees cybersecurity and regional ICT to rebound in 2022.
He notes that StarHub’s cybersecurity business Ensign is a joint venture with Temasek Holdings and is a product of several M&As. According to StarHub, Ensign held a roughly 16% share in its home market of Singapore in early 2020.
As part of its corporate strategy, Singtel is also moving its cyber security capabilities from Trustwave into Singapore, Australia and NCS where they are most needed especially for 5G enterprise solutions.
“It is evident that a telco cannot succeed in the 5G enterprise market without a compelling suite of cybersecurity services,” says Mittal.
“As deferred projects in 2020 are being re-committed for 2021 and beyond, we expect an enhanced performance from cybersecurity services,” he adds.
Photo: The Edge Singapore/ Samuel Issac Chua
