Telecoms Sector

UOB Kay Hian, July 1

THE Infocomm Development Authority (IDA) has initiated industry consultation on enhancing competition and service innovation. It could adopt a more heavy-handed approach of implementing wholesale price regulations or setting a minimum allocation of network capacity for MVNOs.

An MVNO is a service provider that does not own a licensed frequency spectrum. Typically, it does not own the underlying wireless network over which its mobile services are provided, but procures wholesale access to network services from an incumbent MNO. The MVNO then resells voice minutes, SMS and data to its customers.

We have surveyed regulatory regimes across various jurisdictions and conclude that:

• Too little and too late: Some 150MHz of spectrum for the 1,800MHz frequency band and 90MHz of spectrum for the 2,500MHz frequency band for 4G were already auctioned and allocated to M1, StarHub and SingTel in July last year. The 900MHz frequency band, which expires in March 2017, is smaller, with only 60MHz of spectrum. Thus, implementing the framework for hosting MVNOs when re-allocating the 900MHz frequency band is unwieldy and unlikely to create the desired industry-wide impact.
• Fixing of wholesale pricing unlikely: The IDA is unlikely to set wholesale pricing at a pre-determined price or formula due to the administrative burden of implementation. Setting wholesale pricing too high is detrimental to MVNOs' survival. However, setting rates too low takes away the incentives for MNOs to invest in their networks. A more elegant approach is to supervise and monitor wholesale pricing to ensure fair access, similar to the practice within the EU.

Maintain "overweight". We see growth and innovation within the mobile space. These include wearable gadgets, such as Google Glass and Samsung Galaxy Gear. In future, all electronic gadgets would be linked by machine-to-machine connections via the "Internet of Things" (IOT). The low levels of gearing for all three telcos also provide potential upside from capital management over the longer term.

On average, the three telcos are trading at a healthy spread of 2.65 per cent above 10-year Singapore government bonds, in line with long-term mean of 2.69 per cent. SingTel's yield spread is 2.03 per cent, above mean of 0.88 per cent. Conversely, StarHub's yield spread is 2.34 per cent, below mean of 3.61 per cent. Our top picks are M1 and SingTel.

M1 ("buy", target price or TP: S$4.05): M1 reversed a declining trend and gained revenue market share from 2012 to Q1 2014. It benefits from growth in data usage and lower handset subsidies as mobile accounted for 78.3 per cent of its service revenue in Q1 2014. M1 hosts MVNO PLDT Singapore that provides SMART Pinoy pre-paid SIM cards.

StarHub ("hold", TP: S$4.33): StarHub faces intense competition for residential broadband services and a saturated pay-TV market. The challenges in residential broadband and pay-TV businesses prevent StarHub from declaring special dividends. Its dividend payout ratio is also stretched at an estimated 96.8 per cent for 2014.

SingTel ("buy", TP: S$4.30): SingTel benefits from consolidation and easing of price competition in Indonesia and India, the two largest markets for its regional mobile associates. It has hiked its dividend payout ratio twice to the current 60-75 per cent. The stock provides an attractive dividend yield of 4.7 per cent, which is almost one standard deviation above mean.

Sector - OVERWEIGHT