Telecom Sector - SMRT changes its mind!

■ SMRT will not bid for 4th telco license with OMGTel, leaving MyRepublic as a possible contender

■ MyRepublic, if it secures the license, plans quite limited capex to target only 10-12% market share in the long term

■ Taking a cue from U Mobile in Malaysia, we model 7% revenue share for the new telco in 2022 versus 10% in 2020 earlier. After sharp decline in share prices recently, we upgrade Singtel and M1 to BUY

SMRT has decided not to bid for the 4th telco license with OMGTel
This leaves MyRepublic as a possible contender for the 4th telco license. MyRepublic plans to spend only US$250-300m, and targets 10-12% market share in the long term. We were concerned that OMGTel was planning capex of S$500m-1bn in case it secured the license. In oue view, MyRepublic may also struggle to raise adequate funding to bid for the license due to the lack of a strong partner.

U Mobile experience shows that market share gains are difficult for players without adequate network investments. In Malaysia, the fourth mobile player - U Mobile - has captured only 6-7% revenue share after 6 years in the prepaid dominated market. U Mobile has relied on incumbent Maxis for roaming on the 3G network. Singapore is a postpaid dominated market with handset subsidies, multiproduct bundling and 2-year contracts. We model 7% revenue share for the new telco by 2022 versus our previous assumption of 10% revenue share by 2020.

Upgrade M1 and Singtel to BUY
To derive our new TPs, we conservatively assumed 100% probability for a 4th telco (versus 80% earlier) and modelled 10% adverse impact on M1’s revenue in 2022 (previously:14% in 2020), 4% adverse impact on StarHub’s revenue (6% previously) and 1% adverse impact on Singtel’s revenue

We upgrade M1 to BUY with revised DCF based (WACC 6.8%, terminal growth 1%) TP of S$3.60 (from S$3.65) implying 8% upside potential and 6% yield. 

We also upgrade Singtel to BUY with SOP based revised TP of S$4.40 (from S$4.45) on valuation grounds as it is trading at 18% discount to its regional peers. 

We mantain HOLD on StarHub with revised DCF based (WACC 6.5%, terminal growth 0%) TP of S$4.10. Under the scenario of no new license award by IDA, our TPs would be raised to S$4.05 for M1, S$4.30 for StarHub and S$4.45 for Singtel. (Read Report)

Source : DBS Group Research

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