Singapore’s telecommunications sector will herald in a new and exciting year, especially with the recent launch of 5G by both telcos Singapore Telecommunications (Singtel) and StarHub.
StarHub was the first to launch its 5G services to its customers. On Aug 18, StarHub customers on the telco’s new Mobile+ or Biz+ mobile plans were among the first to experience the new 5G network on their 5G-supported mobile devices at no additional costs.
Following closely behind, Singtel launched its 5G network on Sept 1 to some 20,000 Singtel customers for free. Singtel will be the first to offer its 5G services at speeds of more than 1Gbps by harnessing the 3.5GHz bandwidth from its newly expanded spectrum holdings as well as existing 2.1GHz spectrum while employing advanced technologies such as dual connectivity.
While new 5G services may introduce new revenue streams for the telcos in FY2021, investors, who had enjoyed a healthy yield from these telco stocks, may need to brace for lower than expected dividends due to higher capital expenditure (capex) in order to secure the licences and maintain the networks.
In a non-rating action commentary dated Nov 17, Fitch Ratings says, “Free cash flow visibility of Singapore’s mobile network operators will hinge on 5G capex increases, despite our expectations of a gradual recovery in enterprise and consumer spending in 2021. The country’s push for a 5G standalone network should drive telecoms capex higher, with the 3.5GHz spectrum band to be freed up for commercial use next year.”
In addition, Fitch Ratings believes that the capex burden will be greater for Singtel than the StarHub-M1 JV.
StarHub has planned for a 5G capex of $200 million over a five-year period, with investments front-loaded in 2HFY2020–FY2021. This includes its own standalone core network and 50% share of investments in radio access network, 3.5GHz base stations, transmission and 5G spectrum cost.
Meanwhile, Singtel only guided group capex for FY2021 ending March 2021 of $2.2 billion, compared to $2 billion in FY2020. FY2021’s capex comprises A$1.5 billion ($1.5 billion) for Singtel’s Australian business, Optus, and some $700 million for the rest of the group.
“Telecoms capex would be higher in 2022 should the 700MHz frequency band becomes available for commercial use in Singapore,” says Fitch Ratings.
“A lack of compelling applications that sufficiently differentiates 5G value from 4G services also suggests any near-term uplift from 5G revenue is unlikely to be significant. We believe 5G investment remains critical for incumbent telcos to strengthen their competitiveness through product differentiation and network quality,” Fitch Ratings adds, while expecting both telcos to manage their capital prudently.
New captains
Over at Singtel, the 5G project was led by Yuen Kuan Moon, who has been promoted from the CEO of consumer Singapore to group CEO, replacing Chua Sock Koong, who will be retiring on Jan 1, 2021.
Yuen is a Singtel veteran who has been with the telco since 1993. His appointment comes after a global search was conducted that considered both internal and external candidates for the job.
Singtel has also appointed Anna Yip, former executive director and CEO of Smartone Telecommunications in Hong Kong and Macau, to take over Yuen’s role. She will be overseeing the consumer business segment in Singapore. She will also be responsible for propelling the telco to become a leading digital services provider as 5G goes mainstream.
DBS Group Research is positive on this leadership change. Analyst Sachin Mittal says, “Yuen is a promising leader who has delivered far superior performance for Singtel’s Singapore Consumer business compared to the core business in Singapore and Australia.”
StarHub too will also be seeing a new CEO as Peter Kaliaropoulos, barely two years on the job, announced his sudden retirement on July 27, citing a family medical emergency. In its results briefing on Nov 6, StarHub said that the global search for a new leader is still ongoing and has already shortlisted the candidates to “less than 10”. A new CEO is expected to lead StarHub by early 2021.
New directions
Under Kaliaropoulos’ leadership, StarHub has doubled down on its focus on its enterprise business rather than be confined within the cut-throat mobile and pay TV segment where margins are diminishing due to price wars.
In a previous interview with The Edge Singapore, Kaliaropoulos said, “The smarter way to stay ahead of the competition is to acquire new businesses, as it can help to accelerate the growth and make up for the declining earnings.” With that, StarHub on March 11 paid $82.1 million for an 88% stake in Malaysia-based data-driven business solutions and information and communications technology (ICT) company Strateq.
“StarHub’s transformation strategy includes accelerating growth and diversification by investing in new, asset-light digital services to complement existing fixed and wireless infrastructure operations,” says Kaliaropoulos.
So far, StarHub’s new focus on its enterprise business has paid off as revenue contribution from this segment increased 11.4% y-o-y in its latest 3QFY2020 ended September.
Operating profits from the cybersecurity services came in at $2.8 million, a $6.4 million improvement from the previous year, while operating profits from regional ICT services was $0.2 million. The operating profits from these two segments helped to offset the lower revenue and profits recorded from the group’s other segments — mobile, pay TV, network solutions and sales of equipment. Overall profit from operations for 3QFY2020 came in at $64.4 million, 19.4% lower than last year.
Although Singtel’s core business remains to be its mobile segment, it has recently won the coveted Singapore digital full-bank licence in a consortium with ride-hailing and digital payments platform Grab. Singtel has a 40% stake in the consortium, while Grab owns the rest.
Since the announcement of the digital bank winners on the evening of Dec 4, Singtel and Grab have wasted no time in appointing former Citibank Singapore’s retail banking head Charles Wong as CEO to run the digital bank.
“We hope to continue to create jobs in the technology and the fintech sectors for Singaporeans, continue to build on the training programs to ensure that Singaporeans are future-ready across data, cybersecurity, as well as technology,” says Wong, adding that the digital bank had already hired about 10–15% of 200 roles it intends to fill up by end-2021.
With increasing pressure by regulators and consumers to focus on strong cybersecurity defences and data protection, the Grab-Singtel digital bank will be making cybersecurity its top priority. As it is, Singtel owns cybersecurity firm Trustwave.
Unstable connection
Overall, both telcos recorded less than stellar results of late. StarHub’s 3QFY2020 earnings were 23.3% lower y-o-y at $44.5 million from $58.0 million in 3QFY2019. This brings 9MFY2020 earnings to $121.9 million, down 19.6% y-o-y. In the same quarter, revenue was down 14.5% y-o-y to $489.7 million. Only its broadband and enterprise businesses were able to generate higher revenue.
Long favoured as a high yield stock, StarHub had to cut its dividends further, in line with deteriorating earnings. For 1HFY2020 ended September, it paid an interim dividend of 2.5 cents per share, lower than the 4.5 cents paid for 1HFY2019. It expects to declare a final dividend equal or higher than 2.5 cents for 2HFY2020, which is lower than 4.5 cents a year earlier. StarHub used to pay five cents every quarter.
StarHub shares closed on Dec 14 at $1.29, down 9.2% year to date.
Singtel, on the other hand, reported better earnings in the latest 1HFY2021 ended September. But this was mainly due to the absence of a one-off provision made for a huge licence fee and spectrum usage charges levied on the entire India mobile industry by its regulator.
Free of the charges incurred last year by its associate in India Bharti Airtel, Singtel reported earnings of $466.1 million in 1HFY2021 despite a 10.2% y-o-y drop in revenue to $7.4 billion, mainly due to the consumer segment of its Australian Optus business which was undergoing structural changes.
Its business in Singapore also suffered as operating revenue from the local consumer business fell 19% y-o-y, mainly due to lower mobile revenue, which, in turn, was caused by lower roaming and prepaid revenues as well as lower equipment sales.
For FY2020 ended March, Singtel’s earnings of $1.1 billion, down 65% y-o-y, was the lowest in recent years. While the drop was partly because of the one-off hit from Bharti, even without, earnings would still have been lower, but by 21% from a year ago.
Like StarHub, Singtel too had to cut dividends. For FY2020, it declared a final dividend of just 5.45 cents per share, down from 10.7 cents in the previous few fiscal years. This brings the total FY2020 dividend to 12.25 cents, versus 17.5 cents in FY2019 and 20.5 cents in FY2018.
And since 1HFY2021’s interim dividend was cut by some 28.6% to 5.1 cents from 6.8 cents, Singtel’s total dividend for FY2021 is expected to be lower than that of FY2020. If so, FY2021 would be the third straight year of lower dividends.
Singtel shares closed at $2.35 on Dec 14, down 30.9% year to date.
Nevertheless, analysts like PhillipCapital’s Paul Chew believe that the worst is likely over for the telcos. “Operationally, mobile revenues have stabilised, as ARPU or selling prices have bottomed out ... But the trajectory of the recovery, namely roaming revenue will be dependent on the resumption of international travel,” he says.
He prefers StarHub as “all divisions are recovering q-o-q and there is higher dividend yield support”. In contrast, Singtel’s broadband business is creating a drag on earnings as customers migrate to the government’s national broadband network.
Chew has a “neutral” call on both stocks, with target prices of $2.44 on Singtel and $1.24 on StarHub.
On the other hand, RHB Group Research has a “buy” call on Singtel with a target price of $3.10. “While near-term challenges remain, we expect stronger earnings recovery from 4QFY2021. At current levels, the valuation of its regional associate has usurped Singtel’s market capitalisation with the core mobile business going for free. Competition and weaker than expected earnings are downside risks, with monetisation of non-core assets as the key upside risk,” says RHB, which rates StarHub “neutral” with a target price of $1.30.
UOB KayHian, however, is bullish on this sector, with “buy” calls on both stocks, and target prices of $2.80 for Singtel and $1.40 for StarHub. Going into 1QFY2021, analyst Lee Len Chong cites channel checks that suggests “fairly benign competitive landscape for the telecommunications sector for 2HFY2020–1QFY2021”.
“This, we believe, will pave the way for incumbents to sustain market share as customers shift to telcos with nationwide 5G access, better network quality and wider coverage,” adds Lee.
