Singtel - Winning Aussie NBN could be negative for shareholders

Before the end of this month, the IDA is expected to announce the OpCo award while the Australian government may also announce the NBN winner. An OpCo win will be positive but we believe it is unlikely that SingTel will get the award unless its proposal is superior to the rest in all aspects, while an NBN win for Optus could be negative for shareholders as it may mean a cut in dividends.

We reckon StarHub has a slight edge over M1 as its triple-play model makes it the best implementor, in our view. We would have considered M1 to be the leading contender if not for its lack of a CEO as it needs the OpCo more than the rest (hence should offer the best wholesale ICO rates ~ 45% of selection weighting) and would have needed the least duplication of resources to fulfil the operational separation requirement. There is still a possibility that SingTel could win (we do not rule out multiple OpCos) but unless its proposal is far better than the rest, the probability is lower as it is already the NetCo.

The Aussie government is also aspiring to award the NBN by end-Mar. The project cost is expected to be A$15b, with government aid of A$4.7b. With Telstra out of the picture, Optus is a leading contender. Even though it will be a minority partner, even a 20-30% stake means A$2-3b is needed. As most of SingTel’s cashflow already goes to paying dividends, it may have to raise debt but this could push net debt to EBITDA from 1x now to 1.5x, the highest in the sector. Cutting dividend payout of 45-60% would reduce the debt needed.

The merger between Vodafone and Hutchison (to form VHA) is expected to be completed by mid-2009. Currently with only 4m and 2m mobile subscribers respectively, a merger will create a close rival to Optus (7.6m) and Telstra (9.4m). Given that mobile services are a commodity product, a larger scale will lower unit costs and enable VHA to be more competitive. Optus, whose margins are already below SingTel’s Singapore average, could suffer a further squeeze.

On balance, we are maintaining our Sell call on the back of (1) possible lower dividends if Optus wins the Australian NBN due to the hefty capex commitment involved, and (2) the growing threat of a squeeze on Optus’s mobile business after Hutchison and Vodafone complete their merger (to form VHA) by mid-2009. It is also not a forgone conclusion that IDA will award the OpCo to SingTel. No change to our forecasts and target price of $2.11.

Sponsored Links

Related Posts by Categories