Singapore Telecom - Staying Underweight on Aussie NBN Risk

Investment Conclusion: As the decision on the Australian NBN approaches, we stay Underweight on SingTel and Overweight on Telstra. Our Underweight rating on SingTel is premised on our view that its valuation premium to NAV is unsustainable in an environment of slowing growth at affiliates. The group’s un-hedged exposure to Asian currencies also puts to question the stock’s defensive nature, in our view.

What’s New? While market commentary has mostly focused on the likely implications for Telstra if it loses NBN initiative; we believe the implications for SingTel, if Optus were to win the bid, have not been well analyzed. We attempt to address this question in our report.

1) Given SingTel’s historical discipline with capex and management’s focus on ROIC, we believe the likelihood of Optus going for an aggressive nationwide NBN rollout without ensuring regulatory protection is low.

2) Based on our analysis, we believe an Optus’ rollout of NBN will struggle to generate positive NPV, even if the government spends A$4.5-5.0 bn without any return.

3) We have done a sensitivity of our key assumptions to understand the likely scenario when such a business becomes viable. The new network would need to garner 60-70% of fixed line revenue or generate margins of 45% to drive positive NPV. Both of these scenarios, while possible, would invoke a much more fierce competitive response from Telstra.

4) Telstra’s recent announcement to upgrade its HFC network in Melbourne shows its leverage in the NBN process. This takes away a substantial wholesale revenue opportunity from the NBN network builder and further reduces its viability.

Sponsored Links

Related Posts by Categories