Why are telcos finding it hard to generate a profit from internet-hungry consumers? In its latest 1HFY2021 results ended September, Singapore Telecommunications (Singtel) recorded a 19% drop in its revenue from the Singapore consumer segment to $871 million from $1.1 billion a year ago, bringing Ebitda to just $326 million, 14% lower than a year ago. Singtel attributed the drop to the Covid-19 pandemic, which resulted in declines in roaming, prepaid customers (foreign workers & tourists) and equipment sales. This lowered average revenue per user (ARPU) for Singapore mobile by 25% y-o-y to $29 while prepaid ARPU fell 22% y-o-y to $13.
StarHub’s 3QFY2020 results ended September saw a drop in revenue for the consumer segment due to same reasons — lower roaming and prepaid revenue due to the travel bans. In an update, StarHub says overall revenue fell 14.5% y-o-y to $489.7 million, mainly due to lower contributions from mobile, pay TV and equipment sales, partially offset by higher revenues from broadband and enterprise business. This brought 3QFY2020 earnings to $44.5 million, 23.3% lower than a year ago while 9MFY2020 earnings fell 19.6% y-o-y to $121.9 million, 19.6%. Meanwhile, mobile service revenue in 3QFY2020 fell 29.4% due to lower postpaid and prepaid revenues.
Paul Chew, head of research at Phillip Securities, agrees that Singtel and StarHub’s valuations are starting to look attractive. However, he is keeping a neutral view on both stocks. “Earnings will be sluggish near-term from roaming drag and overall economic weakness,” he says, referring to the hit from foregone roaming revenue that is typically around 20% of the telcos’ mobile revenue. Besides valuations, Chew sees potential bright spots, such as the cybersecurity offerings the telcos have built up, which he believes is “undervalued”.
Maybank Kim Eng’s Kareen Chan, is more upbeat as the availability of vaccines is seen to help economies bounce back. “We think the worst is over and the sector should gradually recover back to pre-Covid levels,” she says. “Competition in the mobile segment appears stable and 5G ARPU uplift could come as early as end-2021,” she adds.
Among the telcos, Chan’s top pick is Singtel on valuation grounds. “The market is ascribing almost zero value to its core operations, and the stock is supported by forward 12-month dividend yield of 5.1%, in line with 10-year historical mean,” says Chan.
As at June 2020, Singapore’s mobile penetration was 153.9%. Also, there are 12.1 million broadband internet subscriptions, or more than two lines for each person. Yet, these topline numbers are merely plastering over a rut of sort that telcos have been suffering from: They have been all but degraded to utilities service providers, the same way water and electricity is sold.
For years, telcos have been trying to sell value-added products on top of basic data plans and internet connections. However, the additional spend is still siphoned away by the likes of Netflix and Spotify. There is also persistent under-cutting by the MVNOs, although Chan notes that the incumbent telcos have thus far held their market share steady.
For analysts, they see the wider availability of 5G as a potential lift for telcos’ ARPU and revenue. Chan has observed price hikes of between 13-19% of 5G plans now available. “We believe that the availability of 5G non-standalone (NSA) coverage and more launches of 5G handsets should drive uptake of new 5G plans. We project 5G adoption rate of 15% by end-2021 and this would provide an ARPU uplift of 1.9-2.8% as early as end-2021,” she says.
“Meanwhile, 5G should also allow incumbents to reset price competition with MVNOs by renegotiating their wholesale contract prices. So far, telcos are seeing stronger-than-expected uptake of 5G handsets and plans,” adds Chan.
More critically, the telcos are betting that 5G will not just lift ARPUs. 5G can help bring in new revenue streams from the industry and business markets, where machinery and equipment or entire systems are connected wirelessly.
Phillip’s Chew notes that every telco technology transition has created new consumer revenue streams. For instance, voice to SMS, then to data. The next evolution will likely be applications bundled with 5G for a richer consumer experience. “The next frontier is for telcos to help enterprises to capitalise on the faster speed and low latency of 5G,” he adds.
The business potential of 5G is recognised by the government too. The Infocomm Media Development Authority (IMDA) on Jan 20 announced the launch of a $30 million fund to accelerate the adoption and commercialisation of 5G solutions. The fund is part of IMDA’s 5G Innovation Programme, which aims to support enterprises’ efforts in adopting 5G solutions to address sector challenges or enterprise-level needs. The fund will also support solution providers and technology developers commercialising 5G solutions, to help make the benefits of 5G more accessible to more companies, including SMEs.
