DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 2 March 2017 Asia Pacific/Singapore Equity Research Telecommunication Services Singapore Telecoms Sector Research Analysts Varun Ahuja, CFA 65 6212 3017 [email protected]THEME Four is a (bigger) crowd Figure 1: TPG can be EBITDA breakeven at ~17% discount to current sector ARPU with 6% mobile and fixed broadband subs share Source: Credit Suisse estimates ■ Addressing key investor queries. With TPG telecom (TPG) emerging as the fourth mobile operator in Singapore, the key questions in investors’ mind are: (1) How much will it cost to build the mobile network?, (2) What are the likely operating costs?, (3) At what ARPU levels TPG can break even?, and (4) Is there more downside to StarHub’s and M1’s stock prices from current levels? In this report, we aim to address these queries. Based on inputs from various industry participants, we have developed a proprietary new operator model to look at the new operator's economics. ■ TPG likely to spend ~S$500 mn on capex by 2021E. We expect TPG to start mobile services in 2H 2018 with 775 macro sites and then to gradually ramp-up to ~1,000 sites by 2021E. On in-building coverage, we expect TPG to have coverage of 575 buildings at the beginning which is likely to expand to 930 buildings by 2021E. We expect the total capex to be ~S$500 mn by 2021E (out of which ~S$300 mn will be spent by 2018E). ■ Pricing likely to fall by 15-25% over the next three years. We forecast TPG’s steady state operating expenses to reach S$185 mn by 2022E, representing ~51% of M1’s 2016 operating cost. Our sensitivity analysis suggests that TPG would turn EBITDA breakeven at a discount of ~17% to the current service ARPU of S$33 with mobile subs share of 6% and fixed broadband subs share of 6%. The ~17% discount can come down further to ~25% if TPG can operate at 45% of M1's cost structure. ■ Remain underweight on M1 and StarHub. We think current stock prices of M1 and StarHub are not fully factoring the increasing competitive dynamics. We see downside risk to consensus 2018/19 EPS estimates for M1 and StarHub. SingTel is our top pick as it has the least exposure to Singapore mobile sector. We have cut our 2017-19E EPS for M1 and StarHub by 0-4% as we bake in higher subsidies. As a result, our target prices for M1 and StarHub reduce by ~3% to S$1.50 and ~4% to S$2.25, respectively. 3.0% 4.5% 6.0% 7.5% 9.0% 10.5% 12.0% -45.0% (115) (86) (57) (29) 0 29 58 -37.5% (107) (74) (42) (9) 24 57 89 -30.0% (99) (63) (26) 11 47 84 121 -22.5% (91) (51) (10) 30 71 112 152 -15.0% (84) (39) 6 50 95 139 184 -7.5% (76) (27) 21 70 118 167 215 0.0% (68) (15) 37 89 142 194 247 % discount to current service ARPU (S$33) Subscriber market share (%)
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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Four is a (bigger) crowd Figure 1: TPG can be EBITDA breakeven at ~17% discount to current
sector ARPU with 6% mobile and fixed broadband subs share
Source: Credit Suisse estimates
■ Addressing key investor queries. With TPG telecom (TPG) emerging as the fourth mobile operator in Singapore, the key questions in investors’ mind are: (1) How much will it cost to build the mobile network?, (2) What are the likely operating costs?, (3) At what ARPU levels TPG can break even?, and (4) Is there more downside to StarHub’s and M1’s stock prices from current levels? In this report, we aim to address these queries. Based on inputs from various industry participants, we have developed a proprietary new operator model to look at the new operator's economics.
■ TPG likely to spend ~S$500 mn on capex by 2021E. We expect TPG to start mobile services in 2H 2018 with 775 macro sites and then to gradually ramp-up to ~1,000 sites by 2021E. On in-building coverage, we expect TPG to have coverage of 575 buildings at the beginning which is likely to expand to 930 buildings by 2021E. We expect the total capex to be ~S$500 mn by 2021E (out of which ~S$300 mn will be spent by 2018E).
■ Pricing likely to fall by 15-25% over the next three years. We forecast TPG’s steady state operating expenses to reach S$185 mn by 2022E, representing ~51% of M1’s 2016 operating cost. Our sensitivity analysis suggests that TPG would turn EBITDA breakeven at a discount of ~17% to the current service ARPU of S$33 with mobile subs share of 6% and fixed broadband subs share of 6%. The ~17% discount can come down further to ~25% if TPG can operate at 45% of M1's cost structure.
■ Remain underweight on M1 and StarHub. We think current stock prices of
M1 and StarHub are not fully factoring the increasing competitive dynamics.
We see downside risk to consensus 2018/19 EPS estimates for M1 and
StarHub. SingTel is our top pick as it has the least exposure to Singapore
mobile sector. We have cut our 2017-19E EPS for M1 and StarHub by 0-4%
as we bake in higher subsidies. As a result, our target prices for M1 and
StarHub reduce by ~3% to S$1.50 and ~4% to S$2.25, respectively.
3.0% 4.5% 6.0% 7.5% 9.0% 10.5% 12.0%
-45.0% (115) (86) (57) (29) 0 29 58
-37.5% (107) (74) (42) (9) 24 57 89
-30.0% (99) (63) (26) 11 47 84 121
-22.5% (91) (51) (10) 30 71 112 152
-15.0% (84) (39) 6 50 95 139 184
-7.5% (76) (27) 21 70 118 167 215
0.0% (68) (15) 37 89 142 194 247
% d
isco
un
t to
cu
rre
nt
serv
ice
AR
PU
(S
$33)
Subscriber m arket share (%)
2 March 2017
Singapore Telecoms Sector 2
Focus charts and table Figure 2: TPG's capex and opex forecasts Figure 3: RoCE sensitivity analysis
M1 Ltd U 2.08 1.50 -27.9% 1,389 14.8x 19.6x 7.8x 8.7x 4.9% 5.7% 5.4% 4.1% Note: Prices as of 28 Feb 2017; O = OUTPERFORM, U = UNDERPERFORM; Source: Company data, Credit Suisse estimates
1) Rating: O = Outperform; N = Neutral; U = Underperform; R = Restricted
2) The averages are based on market capitalisation.
3) The PE for non-Asian stocks are based on Credit Suisse adjusted EPS.
4) The financial years of Softbank, KDDI, NTT, NTT DoCoMo, Bharti, Reliance and SingTel are ended in March. For the sake of comparison, FY14 of these companies in this matrix represents FY3/15 of their financial years and etc.
5) PCCW's earnings excludes contribution from Cyber Port.
margins in 2016) partially bakes in higher handset subsidies, in our view. Besides the
mobile market, we expect competitive dynamics to worsen in the broadband market over
the next 12-18 with the likely entry of TPG.
What about M&A? possible but sector needs to witness the pain first
While we expect Singapore mobile sector to be a three-player market in the long term
(three years and beyond), we do not think that the sector is likely to witness consolidation
in the next 3-5 years as the regulator would like to see TPG launch its own network.
Hence, the sector needs to pass through a heightened competitive phase before we can
witness consolidation.
However, despite M1's and StarHub's share prices correcting by ~22% and ~21%
respectively since the announcement (1 Sep'16) of new entrant in Singapore mobile
sector, we believe that the current stock prices are not fully baking in the increasing
competitive dynamics. Hence, we reiterate our UNDERPERFORM stance on M1 and
StarHub. SingTel is our preferred pick as it has the least exposure to Singapore mobile
sector.
While we have been factoring in 15-20% decline in service ARPU over the next three
years (by 2019E), we have further trimmed our 2017-19 EPS estimates for M1 and
StarHub by 0-4% as we factor in higher subsidies. As a result, our target prices for M1 and
StarHub reduces by 3.2% to S$1.50 (from S$1.55) and 4.3% to S$2.25 (from S$2.35)
respectively. The impact on SingTel's earnings and target price is negligible.
Figure 26: Singapore Telcos changes in estimates
Rating Target Price % Year % change in revenue % change in EBITDA % change in earnings % change in dividends
New Previous New Previous chng T T+1 T+2 T+3 T+1 T+2 T+3 T+1 T+2 T+3 T+1 T+2 T+3
SingTel O O 4.60 4.60 0.0% 03/16 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.7% 0.0% 0.0% 0.0% 0.0% 0.0%
StarHub U U 2.25 2.35 -4.3% 12/16 -0.4% -0.3% -0.2% -0.4% -0.8% -1.7% -0.7% -1.7% -3.6% 0.0% 0.0% 0.0%
M1 Ltd U U 1.50 1.55 -3.2% 12/16 -0.1% -0.2% -1.2% -0.2% -0.7% -2.2% -0.4% -1.2% -3.6% -0.4% -1.2% -3.6%
Source: Credit Suisse estimates
We see downside to consensus estimates
We see significant downside risk to consensus 2018 and 2019 earnings estimates for M1
and StarHub as we do not think consensus is fully building in competitive dynamics for the
Singapore mobile sector.
We think handset subsidies are likely to increase over the next
12-18 months
We have trimmed our 2017-19E EPS
estimates for M1 and Singapore as we factor
in higher subsidies
2 March 2017
Singapore Telecoms Sector 17
Figure 27: M1 – CS vs consensus estimates
(S$ mn, Y/E December) 2017E 2018E 2019E
Revenue - CS 1,081 1,067 1,050
Revenue - Consensus 1,048 1,010 994
- % difference 3.1% 5.6% 5.6%
EBITDA - CS 300 270 258
EBITDA - Consensus 312 298 280
- % difference -4.0% -9.2% -7.8%
PAT - CS 130 99 84
PAT - Consensus 142 131 112
- % difference -8.2% -24.9% -25.0%
Dividend - CS 11.22 8.48 7.25
Dividend - Consensus 12.30 10.90 9.10
- % difference -8.8% -22.2% -20.3%
Source: IBES, Credit Suisse estimates
Figure 28: StarHub – CS vs consensus estimates
(S$ mn, Y/E December) 2017E 2018E 2019E
Revenue - CS 2,391 2,325 2,286
Revenue - Consensus 2,395 2,366 2,354
- % difference -0.2% -1.7% -2.9%
EBITDA - CS 630 579 558
EBITDA - Consensus 635 628 629
- % difference -0.8% -7.8% -11.2%
PAT - CS 277 230 211
PAT - Consensus 284 276 264
- % difference -2.3% -16.6% -20.3%
Dividend - CS 16.00 16.00 16.00
Dividend - Consensus 16.10 16.00 15.80
- % difference -0.6% 0.0% 1.3%
Source: IBES, Credit Suisse estimates
Figure 29: SingTel – CS vs consensus estimates
(S$ mn, Y/E March) FY17E FY18E FY18E
Revenue - CS 16,463 16,935 17,346
Revenue - Consensus 16,572 17,009 17,357
- % difference -0.7% -0.4% -0.1%
EBITDA - CS 4,958 5,075 5,141
EBITDA - Consensus 5,467 5,623 5,704
- % difference -9.3% -9.7% -9.9%
Net profit - CS 3,766 4,014 4,176
Net profit - Consensus 3,919 4,185 4,375
- % difference -3.9% -4.1% -4.6%
Dividend - CS 17.8 18.2 18.9
Dividend - Consensus 17.7 18.5 19.6
- % difference 0.5% -1.7% -3.5%
Source: IBES, Credit Suisse estimates
We see significant downside risk to
consensus 2018 and 2019 EPS estimates for
M1 and StarHub
2 March 2017
Singapore Telecoms Sector 18
Singapore telcos valuation not compelling from regional perspective
Additionally, the M1's and StarHub's valuations are not attractive as they are offering one
of the lowest dividend yield spread compared to regional peers and also historically.
Figure 30: Asian telecoms dividend yield spread
Note 1: Yield spread calculated as 12M forward dividend yield minus respective 10-year gov't bond yield; Note 2: Historical mean excludes the Global Financial crisis period. Note 3: Prices as of 28 Feb 2017; Source: Bloomberg, Reuters, Company data, Credit Suisse estimates
Stock views
■ M1 (UNDERPERFORM, TP S$1.50): M1 remains the most vulnerable to the entry of
the fourth mobile operator in Singapore, given 90% of its service revenue comes from
the mobile segment. M1’s 2016 result performance reflects the same as the
competitive intensity rose in 2016 with incumbents looking to pre-empt the entry of new
operator. We expect pricing in the mobile sector to decline further over the next 2-3
years as TPG launches services in 2H 2018. As a result, we expect M1 earnings and
dividend to decline over the next three years. Our new target price of S$1.50 (from
S$1.55) is DCF-based wherein we have assumed a WACC of 7.2% and terminal
growth of 0%. Our target price implies a 2017E/18E of EV/EBITDA of 6.0x/6.7x and
dividend yield of 7.4%/5.6%.
■ StarHub (UNDERPERFORM, TP S$2.25): StarHub is also impacted by the rising
competition in the mobile sector as ~55% of its service revenue comes from the mobile
market. However, compared to M1, StarHub is better placed given its better bundling
proposition and its much stronger footing in fixed-network services. That said, we think
StarHub’s bundling proposition is likely to lose sheen in the medium to longer term with
the emergence of IP TV boxes and OTT services. StarHub has cut its 2017 dividend
guidance to S¢16/sh (from S¢20/sh), reflecting the challenging medium-term outlook.
Our target price of S$2.25 (from S$2.35) is based on SOTP. In our SOTP valuation, we
value the cellular, fixed line, and pay TV/broadband businesses separately using DCF
methodology. We have assumed a WACC of 7.2% and terminal growth of 0% for our
DCF. Our target price implies a 2017E/18E of EV/EBITDA of 7.3x/7.9x and dividend
yield of 7.1%/7.1%.
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
Sin
gT
el
M1
Sta
rHub
HK
BN
HT
HK
CH
T
Sm
arT
one
FE
T
TW
M
HK
T
PC
CW
+/- 1 SD Hist average Current
M1 and StarHub are offering one of the
lowest dividend yield spread compared to
regional peers
2 March 2017
Singapore Telecoms Sector 19
■ SingTel (OUTPERFORM, TP S$4.60): SingTel is our preferred pick in the Singapore
telecom sector as we have a positive view on most of the company's businesses
except for Bharti Airtel (India business). We believe the stock offers a unique
combination of yield and growth (coming from international associates). Further, the
company is least exposed to the potentially rising competitive scenario in the
Singapore cellular market as ~5% of our target price comes from the cellular market.
Additionally, the expectations of special dividends from the Netlink Trust IPO, over the
next 12-15 months, will limit the downside potential in the stock, in our view. We value
Singapore and Australia businesses using DCF methodology and the international
associates at their respective CS target prices. Singapore accounts for ~19% of our
Globe ~5%, Intouch ~3%, and others account for the remaining ~4%.
Figure 31: SingTel SoTP based valuation
(S$ mn) Equity value SingTel's stake Equity value Equity value
/share (S$)
% contribution
Singapore 13,993 100.0% 13,993 0.86 18.6%
Australia 16,339 100.0% 16,339 1.00 21.8%
Total Core 30,332 30,332 1.86 40.4%
Telkomsel - Indonesia 57,473 35.0% 20,116 1.23 26.8%
Bharti - India 25,328 36.3% 9,189 0.56 12.2%
AIS - Thailand 26,501 23.3% 6,175 0.38 8.2%
Globe - Philippines 8,612 47.2% 4,065 0.25 5.4%
Intouch - Thailand 10,141 21.0% 2,130 0.13 2.8%
Others 3,079 0.19 4.1%
Total Associates 44,753 2.74 59.6%
Total SingTel Group 75,085 4.60 100.0%
CS TP (Rounded) 4.60
Source: Credit Suisse estimates
2 March 2017
Singapore Telecoms Sector 20
Companies Mentioned (Price as of 28-Feb-2017) Advanced Info Service PCL (ADVANC.BK, Bt167.0) Axiata Group Berhad (AXIA.KL, RM4.43) Bharti Airtel Ltd (BRTI.BO, Rs365.15) China Mobile Limited (0941.HK, HK$85.6) China Telecom (0728.HK, HK$3.65) China Unicom Hong Kong Ltd (0762.HK, HK$9.44) ChungHwa Telecom (2412.TW, NT$102.0) DiGi.Com (DSOM.KL, RM5.04) Far EasTone Telecom (4904.TW, NT$74.0) Globe Telecom (GLO.PS, P1828.0) HKBN (1310.HK, HK$9.05) HKT Trust (6823.HK, HK$10.36) Hutchison Telecommunications HK Holdings Ltd. (0215.HK, HK$2.43) Idea Cellular Ltd (IDEA.BO, Rs115.45) Jasmine International (JAS.BK, Bt8.8) KT Corp (030200.KS, W30,450) LG Uplus (032640.KS, W12,800) M1 Limited (MONE.SI, S$2.08, UNDERPERFORM, TP S$1.5) Maxis Berhad (MXSC.KL, RM6.31) PCCW (0008.HK, HK$4.73) PT Indosat Tbk (ISAT.JK, Rp7,100) PT Telkom (Telekomunikasi Indo.) (TLKM.JK, Rp3,850) Philippine Long Distance Telephone Company (TEL.PS, P1460.0) Pt Link Net Tbk (LINK.JK, Rp4,860) Reliance Communication Ltd (RLCM.BO, Rs38.9) Singapore Telecom (STEL.SI, S$3.94, OUTPERFORM, TP S$4.6) SmarTone Telecom (0315.HK, HK$10.54) Spark NZ (SPK.NZ, NZ$3.59) StarHub Ltd (STAR.SI, S$2.88, UNDERPERFORM, TP S$2.25) Taiwan Mobile (3045.TW, NT$108.0) Telekom Malaysia (TLMM.KL, RM6.16) Telstra Corporation (TLS.AX, A$4.82) Total Access Communication PCL (DTAC.BK, Bt43.5) True Corp PCL (TRUE.BK, Bt6.25) XL Axiata Tbk (EXCL.JK, Rp2,990)
Disclosure Appendix
Analyst Certification I, Varun Ahuja, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for KT Corp (030200.KS)
030200.KS Closing Price Target Price
Date (W) (W) Rating
10-Mar-14 28,800 35,000 N
08-Apr-14 31,250 37,000
08-Jul-14 30,700 36,000
13-Feb-15 29,200 36,000 O
04-May-15 32,250 40,000
07-May-15 31,100 37,000
30-Oct-15 29,550 37,000 *
07-Mar-16 28,500 36,000 *
30-Jun-16 29,650 37,000
01-Aug-16 32,600 38,000
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
O U T PERFO RM
2 March 2017
Singapore Telecoms Sector 21
3-Year Price and Rating History for LG Uplus (032640.KS)
032640.KS Closing Price Target Price
Date (W) (W) Rating
28-Apr-14 10,150 13,000 O
22-Sep-14 12,250 15,000
26-Jan-15 12,500 16,000
07-May-15 9,850 12,000
28-Oct-15 11,350 13,000 *
07-Mar-16 10,300 12,800 *
01-Aug-16 11,400 13,000
31-Oct-16 11,800 13,800
02-Feb-17 11,550 15,000
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
3-Year Price and Rating History for M1 Limited (MONE.SI)
MONE.SI Closing Price Target Price
Date (S$) (S$) Rating
15-Jul-14 3.59 3.73 N
19-Jan-15 3.62 3.85
07-Oct-15 2.92 2.35 U *
19-Jan-16 2.50 2.15
13-Apr-16 2.48 2.05
02-Sep-16 2.51 2.00
19-Sep-16 2.43 1.75
18-Oct-16 2.33 1.65
24-Jan-17 2.17 1.55
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
U N D ERPERFO RM
3-Year Price and Rating History for Singapore Telecom (STEL.SI)
STEL.SI Closing Price Target Price
Date (S$) (S$) Rating
03-Apr-14 3.67 3.90 N
05-Jun-14 3.86 3.84
15-Aug-14 3.91 4.00
12-Feb-15 4.18 4.15
08-Oct-15 3.77 4.25 O *
13-Nov-15 3.86 4.40
14-Jan-16 3.50 4.20
12-Apr-16 3.69 4.35
12-May-16 3.89 4.40
20-Jun-16 3.85 4.45
11-Aug-16 4.27 4.75
05-Sep-16 3.95 4.65
19-Sep-16 3.97 4.55
10-Nov-16 3.84 4.50
09-Feb-17 3.88 4.60
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
O U T PERFO RM
2 March 2017
Singapore Telecoms Sector 22
3-Year Price and Rating History for StarHub Ltd (STAR.SI)
STAR.SI Closing Price Target Price
Date (S$) (S$) Rating
15-Jul-14 4.14 3.95 U
08-Oct-15 3.58 3.10 *
21-Jan-16 3.33 3.05
17-Feb-16 3.56 3.00
19-Sep-16 3.46 2.65
06-Feb-17 2.80 2.35
* Asterisk signifies initiation or assumption of coverage.
UN D ERPERFO RM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
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Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 45% (64% banking clients) Neutral/Hold* 39% (60% banking clients) Underperform/Sell* 14% (53% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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2 March 2017
Singapore Telecoms Sector 23
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Target Price and Rating Valuation Methodology and Risks: (12 months) for M1 Limited (MONE.SI)
Method: Our 12-month target price of S$1.50 for M1 Ltd is based on discounted cash flow valuation based on a 7.2% weighted average cost of capital (WACC) and a 0.0% terminal growth rate. Our 7.2% WACC is based on a 8.0% cost of equity and a 3.7% cost of debt (post tax shield). At our target price, M1 would be trading at an FY17E/18E EV/EBITDA of 6.0x/6.7x below its historical range as we expect entry of fourth cellular operator in Singapore market leading to pressure on earnings and hence dividend and accordingly we maintain our UNDERPERFORM rating.
Risk: Risks to our 12-month target price of S$1.50 and UNDERPERFORM rating for M1 Ltd include: (1) absence of fourth cellular operator from Singapore Telecoms sector, (2) more severe than expected competition among the telcos in Singapore, (3) slower than expected growth in key business segments in Singapore and (4) changes in regulatory environment.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Singapore Telecom (STEL.SI)
Method: Our target price of S$4.60 for Singapore Telecom is based on a sum-of-the parts calculation. The core Singapore and Australia operations within the sum-of-the-parts, which contribute S$1.86 of the total, are valued using discounted cash flow (DCF) analysis. For Singapore, we use an estimated 6.8% weighted average cost of capital (WACC) and we use a terminal growth rate of 0.0% for mobile and 0.0% for fixed line, For Australia, we use an estimated 7.5% WACC and we use 0.5% terminal growth. The associates, which contribute S$2.74 within our sum-of-the-parts, are also valued using DCF. For Singtel's 35% stake in Telkomsel, we value at S$1.23. For Singtel's 36% stake in Bharti Airtel, we value at S$0.56. For Singtel's 23% stake in AIS, we value at S$0.38. For SingTel's 21% stake in Intouch, we value at S$0.13. For Singtel's 47% stake in Globe, we value at S$0.25. We also value Singtel's 26% stake in SingPost at S$0.04 and 100% stake in NetLink Trust at S$0.14. We have an OUTPERFORM rating on SingTel primarily due to its international exposure.
Risk: The key risks to our S$4.60 target price and OUTPERFORM rating for Singtel include: (1) Foreign currency fluctuations, (2) more severe than expected competition among the telcos in Singapore and Australia, as well as key regional markets, (3) slower than expected growth in key business segments in key regional markets, (4) changes in regulatory environment, and (5) acquisition risk.
Target Price and Rating Valuation Methodology and Risks: (12 months) for StarHub Ltd (STAR.SI)
Method: Our target price of S$2.25 for Starhub is derived from discounted cash flow (DCF) based on weighted average cost of capital (WACC) of 7.2%, 0.0% terminal growth rate for mobile, 0.0% for cable & broadband, and 0.0% for Fixed network services respectively. Our 7.2% WACC is based on a 8.0% cost of equity and a 3.7% cost of debt (post tax shield). At our target price, StarHub would be trading at an 2017E/18E EV/EBITDA of 7.3x/7.9x below its historical range as we expect entry of fourth cellular operator in Singapore market leading to pressure on earnings and accordingly maintain our UNDERPERFORM rating.
Risk: Key risks to achievement of our S$2.25 target price and UNDERPERFORM rating for StarHub include: (1) less severe than expected competition among the telcos in Singapore, (2) higher than expected growth in key business segments in Singapore and (3) lower than expected capital expenditure and higher than expected savings from infrastructure sharing arragement with M1.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (STEL.SI, STAR.SI, 6823.HK, SPK.NZ, ISAT.JK, TLS.AX, EXCL.JK, 1310.HK, GLO.PS, TRUE.BK, DSOM.KL, LINK.JK, TLMM.KL, RLCM.BO, 0215.HK, AXIA.KL, TLKM.JK, TEL.PS, 0008.HK, ADVANC.BK, 030200.KS, 0315.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (STEL.SI, EXCL.JK, 1310.HK, GLO.PS, DSOM.KL, AXIA.KL, TLKM.JK, TEL.PS, ADVANC.BK) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (STEL.SI, DSOM.KL, TLKM.JK) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (STEL.SI, EXCL.JK, 1310.HK, GLO.PS, DSOM.KL, AXIA.KL, TLKM.JK, TEL.PS, ADVANC.BK) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (STEL.SI, MONE.SI, STAR.SI, 6823.HK, BRTI.BO, SPK.NZ, ISAT.JK, DTAC.BK, TLS.AX, EXCL.JK, 1310.HK, 0762.HK, GLO.PS, TRUE.BK, 3045.TW, IDEA.BO,
DSOM.KL, LINK.JK, TLMM.KL, RLCM.BO, 0215.HK, AXIA.KL, TLKM.JK, 2412.TW, 032640.KS, 0728.HK, TEL.PS, 0008.HK, ADVANC.BK, 030200.KS, 0315.HK) within the next 3 months. Credit Suisse may have interest in (DSOM.KL, TLMM.KL, AXIA.KL, MXSC.KL) Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (BRTI.BO, IDEA.BO, RLCM.BO) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (0762.HK, 2412.TW, 0728.HK, 4904.TW). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (TRUE.BK, 032640.KS, 030200.KS).
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Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (TLMM.KL). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (STEL.SI, DSOM.KL, LINK.JK, RLCM.BO, TLKM.JK) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. For Thai listed companies mentioned in this report, the independent 2014 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Jasmine International () , Total Access Communication PCL (Excellent) , True Corp PCL (Very Good) , Advanced Info Service PCL (Excellent) Taiwanese Disclosures: This research report is for reference only. Recipients should carefully consider their own investment risk and note they may be subject to the applicable rules and regulations in Taiwan, including the requirements under the Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers ("Taiwan Recommendation Rules") on conflicts of interest. Investment results are the responsibility of the individual investor. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Recommendation Rules. Reports may not be reproduced without the permission of Credit Suisse. Credit Suisse has entered into a strategic partnership with First NZ Capital ("FNZC"). Pursuant to this agreement, (SPK.NZ) is jointly covered by Credit Suisse and First NZ Capital. This research report is authored by: Credit Suisse AG, Singapore Branch ........................................................................................................................................... Varun Ahuja, CFA To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Singapore Branch ........................................................................................................................................... Varun Ahuja, CFA
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