DBS Group Research analyst Sachin Mittal says the coming 2023 will be “another exciting year” for the telecom sector, with mobile recovery set to continue, led by doubling of 5G users and tourist arrivals.
In his Dec 5 report, Mittal says that inbound and outbound travel easing after April has benefitted the mobile services segment. Recovery in roaming and prepaid revenue is expected to lead to an over 6% y-o-y rise in mobile services revenue in 2023, compared to the 2% decline in 2021 and 24% decline in 2020.
He adds that there is still room for further recovery, with the number of tourists in October still standing at half of pre-pandemic levels. This momentum coupled with 5G-led average revenue per unit (ARPU) uplift might lead to revenue growth of 4% for 2024, says Mittal.
He is projecting 5G penetration of post-paid users to double to 40% in 2023 with 5G commanding a 15% to 20% premium over 4G pricing. Singtel’s 5G ARPU is $5 to $10 higher than its 4G ARPU, while StarHub’s ARPU is $12 to $13 higher than its 4G ARPU, at a 40% premium to its postpaid ARPU of $31.
“However, M1 and mobile virtual network operators (MVNO) like Circles.Life are more aggressive in terms of 5G pricing so we expect 5G’s premium over 4G pricing to reduce to 15% to 20%,” explains Mittal.
Industry consolidation
Mittal also says that Simba Telecom, formerly known as TPG Singapore, could also become an acquisition target in 2023 as its cash flow may remain negative for another few years due to the 5G capex cycle. Simba, the fourth network operator in Singapore, has achieved an ebitda of $900,000 with 392,000 paying mobile subscribers in 2021.
“We expect Simba will be acquired over the next 12 to 18 months amidst achieving EBITDA breakeven. This is primarily because the 5G capex requirement and cycle will be an enormous challenge for Simba to achieve positive free cash flow,” explains Mittal. “Simba could be acquired by other telcos to enhance the competition in the lower end coupled with the possibility of improving the price points at the lower end.”
Mittal says that if Simba is acquired in the next 12 to 18 months, then 2024 could experience mobile services revenue growth of 5% due to industry consolidation. In his view, the telco could be up for sale with “regulatory support”.
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Industry picks
The DBS analyst notes that Singtel, his top pick, has outperformed the Straits Times Index (STI) by 13% year-to-date (YTD), rising 17% YTD excluding dividends.
He is recommending “buy” for Singtel and “hold” for both StarHub and NetLink, with target prices (TPs) of $3.15, $1.02 and 90 cents respectively.
According to him, Singtel’s rise was powered by a 19% rise in Bharti’s market cap which comprises 44% of DBS’ Singtel valuation and a reduction in the Holding Company (HoldCo) discount to 30% to 31% from 38% to 40% in January.
Mittal believes that Singtel’s 31% HoldCo discount could normalise to the 10% to 15% level seen before 2018. “The current HoldCo discount at around 31% has narrowed from 38% to 40% mainly due to the stabilisation of core operating from Singapore and Australia in 1HFY2023 after 4-years of sharp decline and a focus on special dividends on top of regular dividends,” he says.
He adds that an absence of English Premier League (EPL) costs alone is likely to benefit Singtel’s core operating profit by 2% or $25 million to $30 million annually. “With further recovery in its core operating profit, we expect the HoldCo discount to narrow to 10% to 15% which was the case when core operating profit was stable before 2018,” Mittal explains.
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Meanwhile, StarHub and NetLink NBN Trust (NetLink) have declined 21% and 10% respectively YTD, with the former impacted by a large cut in its FY2022 and FY2023 earnings from substantial digital investments, says Mittal.
As for StarHub, its earnings recovery will be delayed from FY2023 to FY2024 due to higher transformation opex pushed into FY2023. In addition, Mittal expects content costs to also rise sharply as FY2023 and FY2024 will see the full-year cost of EPL rights compared to the five months in FY2022.
“This would largely offset the recovery in mobile and enterprise revenue in FY2023. There could also be downside to our stable net profit projection in FY2023 depending on the cost impact of EPL,” says Mittal.
He notes that the assured dividends per share (DPS) of 5 cents or 80% of StarHub’s net profit, whichever is higher in FY2022 and FY2023, implies a decent 5% yield for investors as they wait for recovery.
Netlink, meanwhile, is trading at a 12-month forward distribution yield of 6.2%, implying a yield-spread of 270 basis points (bps). Given that Singapore government’s 10-year bond yield has risen to 3.45%, the current share price implies a yield spread of 270bps compared to its 3-year average yield spread of 370bps, notes Mittal.
“However, we expect NLT’s distribution per unit (DPU) to rise annually by 2% per annum over the next few years, and the yield-spread to narrow towards 250bps, reflecting the resilient nature of its distributions,” he adds.
He does not expect high inflation to eat into NetLink’s distributions. He expects the regulatory weighted average cost of capital (WACC) for NetLink to be raised for the next review period over January 2023 to December 2027 due to a sharp rise in the risk-free rate.
As at 11.51am, shares in Singtel were trading 1 cent or 0.37% down at $2.69, shares in StarHub were trading flat at $1.09 and units in NetLink were trading 0.5 cents or 0.6% down at 83 cents.
