The telecommunications is an essential sector for almost every Singaporean given the prevalence of mobile phones. Not to mention our heavy reliance on the internet which means that we have to stay connected through our data plans or connecting to wifi. In this article, we will be highlighting three important takeaways by RHB Securities that investors should know about the telecommunications sector.
- Strong competition to continue
The heightened competition in the sector has been on-going for some time ever since the introduction of the fourth telco with the entry of TPG Telecom and the introduction of two other mobile virtual network operators (MVNO) which will likely be hosted by StarHub. MVNOs are operators that provide wireless communication services using wireless network infrastructure that is not owned by them and Circles. Life has been the first MVNO to start providing services in Singapore, tapping on M1’s network.
TPG has announced that it has contracted vendors to work on its network infrastructure such as site radio network equipment, installation, data centres etc. The service provider should be able to complete its nationwide outdoor coverage by the end of this year, in line with the deadline set by the Government. RHB Securities anticipates that TPG will be able to start providing a pure mobile service by the second half of 2018.
With the introduction of the fourth telco and rising competition from other MVNO, the existing three telcos will have to compete hard to maintain its market share.
- Data war to continue with the re-introduction of unlimited plans
In preparation for more competition, local operators have once again rolled out unlimited data plans to secure subscribers. The plans were introduced alongside the launches of the new iPhones as that is when most people typically re-contracts to purchase a new headset at a subsidized price.
Analysts at RHB opines that such unlimited plans are ARPU-accretive (average revenue per user) as it encourages existing customers to upgrade their plans to a more comprehensive one that includes more mobile data.
- Now is not a good time to enter the market
Mobile Service Revenue (MSR) has continued to fall for eight quarters due to a prolonged decline in usage and roaming revenue. Overall, the industry saw a 1.8 percent decline in MSR for 9M17. Despite this, M1 outperformed the industry and saw an increase in its MSR by 3.4 percent quarter on quarter for the third quarter of 2017 due to the increased popularity of Circles. Life which has been gaining significant market share for the past year.
The industry is expected to see another two to three percent decline in MSR this year.
The FTSE Straits Times Telecommunications Index has also continued to underperform the Straits Times Index in the recent 18 to 24 months period. Despite the weaker performance as compared to the broader market, valuations remain slightly above the 5-year historical mean. This has prompted analysts at RHB to keep its Neutral call on the sector, especially so after taking into consideration the likely intensification of competition in the sector which will probably erode margins.
Investors should wait till revenue shows a more evident sign of improvement and when the product offerings of the new competitors are known to make a more informed investment decision.
RHB Securities has highlighted Singtel as their preferred stock due to the diversified nature of the firm with a “fairly decent average FY18F-19F dividend yield of 5.3 percent and its strength in the enterprise segment”.