Telecos Sector

Maybank Kim Eng Research, Nov 25.

INFOCOMM Development Authority (IDA)'s conditional approval of the proposed sale of OpenNet to NetLink Trust, in our view, does not have much of an impact on our calls on Singapore telcos.

IDA has approved the sale of OpenNet by its four major shareholders (SingTel holds a 30 per cent equity stake) to NetLink Trust, which is wholly owned by SingTel. SingTel has also been granted an extension to reduce its equity stake in NetLink Trust (to 25 per cent via a public offering) to April 2018 from April 2014.

To address industry concerns over preferential treatment to SingTel by OpenNet, IDA has imposed some key conditions:

(1) the need for an independent board of directors,

(2) a "monitoring" board staffed by government officials,

(3) NetLink Trust to seek IDA approval to appoint contractors, and

(4) SingTel to transfer its entire sub-contracting team to NetLink Trust.

Our view: Better but still not enough.

We take the view of StarHub, M1 and other internet service providers who are likely to view this development as a non-event.

Our largest concern lies in the four-year extension for SingTel to sell down its stake in NetLink Trust as it will prolong a dissatisfactory state of the industry.

Ideally, the monitoring board created should also be staffed by StarHub and M1 representatives.

IDA's decision to put conditions on OpenNet's shareholders' proposal to up stakes to NetLink Trust stemmed from industry concerns that OpenNet was causing delays to the fibre rollout plans for the rest of the industry and the sale would not solve the problems but could even make it worse.

StarHub and M1 have been living with this state of affairs for years now and they have evolved in their own ways of coping. For commercial buildings, for example, instead of waiting for OpenNet to complete the fibre connections, they have built their own fibre optic networks wherever it makes economic sense and they can reach separate agreements with specific building owners that are willing to allow them to run their own separate riser cables onto each floor.

However, this is obviously still not a satisfactory situation for them and any progress made on the OpenNet issue will still be icing on the cake and the bottomline is that SingTel is the one that is under official pressure, no matter how compromised.

Any improvements can only benefit StarHub and M1 in the long run. On the other hand, shareholders of SingTel hoping for a special dividend from the spin-off of NetLink Trust would be disappointed with the delay.

This latest development does not have much of an impact on our calls on Singapore telcos, which remains a BUY on StarHub and M1, and a HOLD on SingTel.

Our top pick for the sector is M1 as we think (1) its earnings growth will rev up faster than the rest of the industry in the next two years on the back of its likely ability to monetise the data front faster than its competitors, and (2) the likelihood of a special dividend.

NEUTRAL for Telcos sector

(Buy M1, buy StarHub, hold SingTel)