Singapore telco sector upgraded to Overweight by UOB KayHian as TPG launch faces delays

Singtel, StarHub and Hoshino Coffee retail outlets in Ion mall in Singapore; taken July 2018.Singtel, StarHub and Hoshino Coffee retail outlets in Ion mall in Singapore; taken July 2018.

UOB KayHian upgraded Singapore’s telecommunications sector to Overweight from Market Weight, pointing to delays in the launch of the city-state’s fourth telco player.

“Our channel checks suggest that TPG is on schedule to launch trial for its 4G mobile network by the fourth quarter of 2018. We expect mobile services on a commercial basis to commence in the second quarter of 2019,” UOB KayHian said in a note on Friday. “This represents a delay of four to six months compared to our original expectations.”

That delay is a reprieve for the existing telcos, the brokerage said.

“The delay encountered by TPG Singapore affords incumbents more time to further saturate the market and to prepare themselves for more intense competition by cutting expenses and streamlining their cost structure,” it said.

Additionally, it said it expected the sector’s strong defensive qualities would help the shares outperform as they provide a shelter if contagion were to spread from the recent emerging market selloff. UOB KayHian noted that the telcos posted positive net additions and post-paid mobile subscribers increased year-on-year during the Global Financial crisis.

UOB KayHian rates Singtel at Buy with S$3.98 target, saying it provides “defensive shelter” because of its geographical diversification, with the Singapore mobile business accounting for only 7 percent of group revenue when including its share of associates’ revenue.

Upgrading StarHub

It upgraded StarHub to Buy, with a S$1.85 target price.

“Execution has improved since Peter Kaliaropoulos took over as CEO with effect from 9 July,” it said, pointing to StarHub’s move to merge its cyber-security businesses with Temasek’s Quann to form Ensign InfoSecurity.

But it kept M1 at Sell, with S$1.55 target.

“M1 is vulnerable to increased competition for mobile in Singapore, which accounted for a sizable 75.7 percent of its service revenue in the second quarter of 2018,” UOB KayHian said.

TPG benefiting from delay?

The delay in launching service also wasn’t all bad for TPG, the brokerage noted.

“From TPG’s perspective, the delay affords it more time to test sub-systems and better integrate different components of its mobile network,” the note said.

It attributed the later launch to “extensive delays” when negotiating with the incumbents to access their jointly build common antenna systems at commercial buildings and MRT stations. It also pointed to TPG taking on the “time-consuming” process of testing and integrating its network itself, rather than hiring contractors, a move which likely helped keep it within its capex budget.

“TPG would have a lean cost structure and would be able to set its pricing more competitively,” UOB KayHian noted.

On Friday, shares of M1 ended down 0.64 percent at S$1.56, StarHub was flat at S$1.64 and Singtel shed 0.32 percent to S$3.13.

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