Singapore Telecommunications - Out Of The Quagmire But Not Out Of The Woods

Authorities are determined to facilitate the entry of a fourth mobile operator. However, whether the 900MHz or 2300MHz frequency band is allocated makes a big difference to the new entrant’s ability to compete. The IDA has not announced the framework for the upcoming spectrum auction. Regulatory uncertainties persist but we are no longer bearish on M1 after the recent steep correction in share price.

WHAT’S NEW
A couple of uncertainties have surfaced on this journey to establish the fourth mobile operator in Singapore. There is no official guidance from regulator Infocomm Development Authority (IDA). 

Nevertheless, our channel checks highlight the following:
a) 900MHz or 2300MHz? Our original premise involves a spectrum auction for the 900MHz frequency band that expires in Mar 17. We had expected a portion of the 900MHz frequency band to be set aside for potential new entrants. Contrary to our earlier expectations, we believe the authorities could consider allocating a portion of the 2300MHz frequency band to the fourth mobile operator. IDA has allowed incumbent mobile operators to utilise the 2300MHz frequency band on a short-term basis for trials on Time Division Duplex (TDD) technology.

Therefore, the 2300MHz frequency band could be made available at a short notice. The 900MHz frequency band provides longer range and better in-building coverage compared with the 2300MHz frequency band. Thus, potential new entrants would have to fork out more capex to roll out their mobile network if iDA decides to set aside a portion of the 2300MHz frequency band for the fourth mobile operator. In addition, only a limited range of handsets supports the TDD technology on the 2300MHz frequency band.

b) A new round of industry consultation? The industry consultation initiated on 22 Apr 14 was supposed to focus on: a) allocation for sub-1GHZ and above 1GHz frequency bands, and b) enhancing competition through mobile virtual network operators (MVNOs). It wasn’t intended to solicit interests or to seek views regarding a fourth mobile operator.

There is speculation that IDA could embark on a new round of industry consultation focusing on issues pertaining to the introduction of a fourth mobile operator, such as frequency spectrum to be set aside and regulatory intervention to support a fourth mobile operator. A new round of industry consultation could delay the planned spectrum auction by about six months.

U-turn from SMRT. SMRT Corporation has announced its decision not to proceed to exercise its option to subscribe for shares in ConsisTel’s subsidiary OMGTEL, who is bidding to be the fourth mobile operator in Singapore. SMRT has reviewed its capital allocation priorities and decided not to make the passive investment. Management will continue to focus on its core business of rail engineering. The about-turn from SMRT highlights potential hiccups that MyRepublic and ConsisTel could encounter when raising funds in preparation for the upcoming spectrum auction.

ACTION
Not out of the woods. We believe the government intends to facilitate the entry of a fourth mobile operator. A new entrant would spur competition in the mobile market and consumers would benefit through more attractive pricing and innovative services.

IDA has yet to release its assessment of the submissions to its original industry consultation. It has also not announced the framework for the upcoming spectrum auction, including qualifying criteria for new entrants.

Maintain MARKET WEIGHT. We have to keep a close watch as events unfold. SingTel remains a safer bet and we are no longer bearish on M1.

M1 (Upgrade to HOLD/S$3.40/Target: S$3.60)
■ M1 remains susceptible to regulatory risks in Singapore with mobile accounting for 81.5% of its service revenue in 1Q15.

■ M1’s share price has corrected 18% post announcement of its 1Q15 results. The steep fall has factored in current regulatory uncertainties.

StarHub (SELL/S$4.02/Target: S$3.50)
■ StarHub remains susceptible to regulatory risks in Singapore with mobile accounting for 56.5% of its service revenue in 1Q15.

■ StarHub suffers from competitive pricing for residential broadband services and a saturated market for pay-TV services.

SingTel (BUY/S$4.12/Target: S$4.80)
■ SingTel benefitted from growth of its regional mobile associates Telkomsel, Bharti Airtel, Advanced Info Service and Globe Telecom.

■ SingTel provides a hedge against regulatory uncertainties in Singapore due to its diversified exposure to overseas markets.

SECTOR CATALYSTS
■ IDA is expected to announce its assessment of the submissions to its industry consultation and the framework for the upcoming spectrum auction.

■ The US Federal Reserve is expected to normalise interest rates in 2H15. The start of an upcycle for interest rates could increase risk aversion towards investing in yield plays and telcos.

ASSUMPTION CHANGES
■ We maintain our existing earnings forecast for M1, StarHub and SingTel.

RISKS
■ US Federal Reserve delays the normalisation in interest rates, which leads to positive sentiments for yield plays. (Read Report)

Source : UOB KayHian Research

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