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JP Morgan: Possible Fourth Telco Operator Spells Trouble
Aspire, Investments | 24 June 2015
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By: Vance Wong
Articles (74) Profile

When there were news of a potential fourth operator entering the telecommunications sector, telecom stocks took a hit by about five to 16 percent. JP Morgan expects the Infocomm Development Authority of Singapore (IDA) to announce some new policies to allow for a new mobile network operator (MNO), or a mobile virtual network operator (MVNO).

What would possibly happen to the sector once a new competitor enters and starts vying for a piece of the pie too? JP Morgan believes that the impact will be lesser if the fourth operator enters as a MVNO, instead of a full-fledged MNO.

Pricing Pressure

In the worst case scenario, the entrance of a fourth MNO would have a significant pricing pressure on the three existing telcos of about 55/30/8 percent for M1/Starhub/Singtel share prices. However, in a less extreme scenario, an MVNO entering will cause a 25/15/5 percent impact on share prices, M1 still taking the biggest hit.

Other than pricing pressure, average revenue per user (ARPU) and profitability will undoubtedly dip as well. JP Morgan foresees a further dip in share prices for the general telco sector, with M1 receiving the most painful blow.

These negative projections are not baseless; JP Morgan derived their predictions from two case studies from France and Malaysia.

France’s Iliad – The Worst Case Scenario

The entry of Iliad, a French MVNO can be used as an example for a worst case scenario where the new player engaged in an aggressive price war with the existing players. The results were market share loss, reduced mobile ARPU and of course total earnings contraction.

While JP Morgan thinks that the telco sector in Singapore could face the same issues, they pointed out that the MVNO landscape in France was fairly developed and Iliad had a reputation of reliable broadband services.

Across The Causeway

Conversely, if the new player does not decide to be aggressive in price competition, Malaysia’s case study will be a good gauge of possible impacts on existing telcos. The Malaysian case study was more special, in the sense that there were several MVNOs that directly depend on the existing players for wireless and network services.

Therefore, Maxis, Digi and Celcom did not lose much market share because they still received revenue from providing services to MVNOs. Furthermore, the MVNOs focused on niche markets, which did not significantly affect the MNOs. This would be the more favourable scenario for Singapore, one that would have moderate impact.

Assessment Of Risk/Reward

Singapore Telecom

Source: Todayonline

According to JP Morgan, Singapore Telecom’s outlook for 3Q this year looks positive because of increasing revenue from its Australian mobile service provider, Optus. Additionally, its stock price has appreciated 8.5 percent over the past three months.

However, losses in its digital business, and enterprise margin pressures are pulling down their overall profitability. The weakening AUD might make this worse, causing JP Morgan to give Singapore Telecom ($4.22) a “Neutral” rating and a target price of $3.85.

M1

Source: Todayonline

As M1 depends heavily on wireless revenue, JP Morgan thinks that M1 will lose its pricing power when the new competitor joins the field. The possibility of IDA introducing a new policy to support the entry of a new competitor seems to be very high too.

Considering these factors, JP Morgan downgrades M1 ($3.23) to an “Underweight” rating, projecting a $2.79 target price.

Starhub

Source: Straits Times

Apart from M1, Starhub is another player that will be heavily affected by a new competitor. JP Morgan feels that Starhub’s pricing power in the wireless market will diminish as well. The only notable competitive advantage it has is having the best coverage underground, based on LTA’s findings.

Starhub has been investing in technology upgrades as well, particularly in mobile and television network. However, it is hard to mitigate its pricing power loss in the wireless market. JP Morgan gives Starhub ($4.03) an “Underweight” rating, with a target price of $3.30.

With a Communications background, Vance has the passion to write with a purpose - to provide content supported with substantial evidence to vested readers.

Please click here for more information about this author.

StarHub  1.320 -0.010 -0.75%   
Business: [FY18 Turnover] Mobile (34.9%), sale of equipment (22.4%), enterprise fixed (21.6%), pay TV (13.2%), broadband (7.9%).

Insight: May-19, 1Q19 total revenue rose 6% to $596.8m attr... Read More


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