The telecommunications industry players have been facing keen competition, and the rest of the year will likely remain challenging with the entry of a fourth operator.
Defending their market share will be one of the top priorities to ensure a stable source of revenue.
Weaker earnings and higher costs
The past quarter was sawed the three current mobile network operators (MNOs) reporting an aggregate core earnings before interest, tax, depreciation and amortisation (EBITDA) contraction of 3.1% year on year.
That has been attributed to the increased competition, higher handset costs, which increase the handset subsidies cost that operators will have to incur, and structural roaming revenue pressure that pushed down the profits for the MNOs.
Furthermore, in anticipation of the entry of TPG in 2018, we are expecting M1 and StarHub to want to sign up new customers and attract existing customers to re-contract to lock them in before the new competition arises.
Therefore, handset subsidies are likely to have to increase to attract more customers to join them instead of the new firm.
Singtel suffered the worst deterioration in their mobile service revenue with a 4.0% dip year on year as they struggle to offset the decline in voice roaming despite greater data usage by subscribers.
However, this is a common trend amongst operators as the telcos saw their postpaid revenue falling between 1.0% to 7.0% year on year.
More people are taking up the sim-only plans instead of bundled/contractual plans, and roaming revenue pressure also brought down postpaid revenue.
The fourth telco: TPG Telecom
With the entry of the fourth telco, many have been worried that the existing telcos will be significantly challenged.
However, recent reports have suggested the new telco TPG telecom will not be posing such a significant threat to the rest.
UOB Kay Hian Research mentioned that with TPG’s focusing on the pre-paid SIM-only plans, “TPG’s positioning in the budget segment does not overlap with M1’s and StarHub’s focus on high-value subscribers, especially those with high-intensity usage of data”.
Furthermore, mobile plans are not bundled with handsets, which are generally not preferred by Singaporeans who are mostly used to opting for post-paid plans bundled with handsets.
Therefore, UOB Kay Hian analysts think the entry of the fourth telcom might not be attractive enough to take away a significant number of subscribers from the other existing operators.
TPG is also facing problems in its primary market Australia as it has recently secured a spectrum in Australia (2x10MHz of the 700MHz Spectrum) at a seemingly overpriced value as they won the bid at 2.2x the price paid by its competitor.
Australia remains to be TPG’s core market with a much larger size of investment in spectrum and network infrastructure. Therefore, one can expect that their expansion into Singapore will not be their top priority.
Therefore, as a whole, the challenge posted by TPG might be less extensive than anticipated.
Both M1 and StarHub are expected to come up with attractive bundled packages, and generous data upsize options in an attempt to retain existing customers and attract new ones.
Currently, there have been talks of a potential network sharing between these two telcos, which have been seen very positively by analysts due to the potential cost savings that both companies can enjoy.
Given that both StarHub and M1 had a below-par performance for the first half of the year, and factoring the increase in handset subsidies that these firms will have to bear, estimated net profits for the next year have been cut.
Currently, UOB Kay Hian Research has placed a target price of $2.62 on StarHub Limited (SGX: CC3) assuming that the collaboration materialises, and if it fails to happen, the target price falls to $2.20.
On the other hand, M1 Limited (SGX: B2F) has a target price of $1.98 or $1.55, depending on whether or not they do collaborate with StarHub, signifying the importance for the two telcos to make the collaboration happen.
A word of caution
For investors who are looking for safer investment options, it might probably be more prudent to assume that the collaboration will not happen and enter the market only when the stock prices fall to an attractive enough price.
With the upcoming release of the new iPhone, operators are expected to have to bear with a lot of handset subsidies to provide attractive enough deals for the customers given iPhone 8 and iPhone 8 plus’s high retail prices.
Venturing into the telecommunication industry now seems to more risky and uncertain with the new developments that are coming up.