SINGAPORE (Oct 20): Analysts believe that local telecommunications operations could stand to benefit, after the Infocomm Media Development Authority of Singapore announced an additional two localised 5G networks up for grabs.

This is double from the existing two nationwide 5G networks.

IMDA is looking to assign the spectrum based on the financial standings of the potential network operators and the network security designs. The results will be announced by June 2020.

However, analysts are mixed over the $55 million price tag of winning the 5G nationwide network spectrum.

Fitch Ratings, for instance, in an Oct 17 report views the price tag as below the cost of Hong Kong’s recent 5G spectrum auction.

Despite being cheaper than Singapore’s Asian rival, JP Morgan analyst Ranjan Sharma notes that the bill for operating the nationwide spectrum until 2022 would be under $500 million for the two operators.

This translates to capital expenditure of $125 million in 2021 and 2022, which represents 15% of Singapore Telecommunications’ capex budget, and 50% of StarHub’s capex budget.

The figure is also 9% of Singtel’s operating free cash flow and 40% of Starhub’s operating free cash flow.

“This is likely to pressure cash flows, leverage and dividend commitments. While we already anticipate substantial reduction in StarHub dividends, further downside risks exist,” Sharma says in an Oct 17 report.

Maybank Kim Eng Research analyst Luis Hilado sees this new development as potentially raising investors’ risk perception on 5G capex.

Competition could also dampen business case scenarios of telcos as well, and the high capex could dampen interest in the new localised licenses, he adds.

Hilado notes that in a recent survey by the brokerage, some 75% consumers are not willing to pay higher monthly bills for 5G.

Yet, a 5G rollout is still required for telcos to remain competitive locally and globally for Singapore. This creates an overhang in the sector for investors waiting for returns on 5G capex.

“Minimising costs and speeding up national rollout through cooperation may be the win-win the consumer and financial markets would want,” says Hilado.

“In our view, the consumer’s increasing treatment of wireless data as a basic service – similar to water, transport and power – begs the question of whether a regulated-returns framework should be the long-term path. This is already the thinking behind the structure for residential fibre broadband that created Netlink Trust,” he adds.

However, it seems like it is not all doom and gloom for telcos here over the 5G-network spectrum, with analysts seeing the potential of a joint bid between Starhub and M1, which could raise Starhub’s share price.

The way DBS Group Research analyst Sachin Mittal sees it, a joint bid could also lower the capex burden for smaller operators.

“Hence, it makes sense for smaller operators to jointly bid for nationwide 5G to lower their capex burden and ensure that 5G service is available to their customers. China Unicom and China Telecom’s share price rose 17% and 5% respectively once rumours of a joint 5G network emerged in mid-August 2019,” says Mittal in an Oct 18 report.

JP Morgan’s Sharma echoes the same view, and sees an opportunity for network operators to reduce capex burden. “Network JVs can enable active asset sharing in our view. Spectrum sharing can result in up to 45% capex and 33% opex savings,” he says.

Fitch Ratings believes that a shared network model is what will make 5G feasible for telcos, providing advantages and capacity. 

“Successful spectrum holders of the 3.5GHz will be required to provide 5G wholesale services, enabling mobile virtual network operators (MVNO) to lease network space without significant cost outlays,” says Fitch Ratings.

“We believe the incumbent telco, Singapore Telecommunications, is well-placed to win 5G spectrum, given its stronger financial standing,” it adds.

JP Morgan’s Sharma believes in a wait and see approach to telcos here. For Sharma, the telco picture will become clearer after 2H20, once the capex requirements are priced in and the impact of the fourth telco is evident.

DBS’ Mittal, however, sees Netlink NBN Trust as a top pick in the telecom sector. He sees a potential benefit for Netlink from providing fibre backhaul for 5G networks if telcos choose not to build their own.

Netlink also has a 5.5% yield against 5% yield offered by large industrial REITs, even with lower gearing, longer asset life and regulated nature. Mittal has a “buy” call and a target price of 95 cents for Netlink.

“We will wait for the right entry point for Singtel as consensus FY20F/21F earnings are likely to be revised down while Singtel needs to divest its digital business to sustain 17.5 cent dividends in order to defend its current credit rating. We maintain our ‘hold’ call on Starhub as we see further downside to FY19F consensus earnings due to sharp decline in cable TV revenue,” says Mittal.

Maybank’s Hilado is also similarly bullish on Netlink, with a “buy” rating and a target price of 90 cents.

Hilado favours Netlink’s healthy balance sheet, with a sustainable DPU linked to operating cash flows than free cash flow growth.

While Netlink management has yet to disclose the additional capex it needs for this year onwards, it has indicated that the capex will be for network densification, which it has flagged to regulator IMDA.

“Following a residential-connection growth spurt this year driven by Starhub’s fibre migration, management expects normal growth to be led by Singapore’s 25k annual household formation,” says Hilado.

He also notes that 5G base-station linkage by fibre will be a boon for Netlink’s non-building access point connection and installation revenue, but will not be significant, with forecasts at 4% of revenue share.