SingTel: Optus rebound not in the price - BUY (Macquarie)

In this note, we discuss some of the key issues and drivers of the medium-term outlook for the core Singapore/Optus business.

• We view the Vodafone-Hutch merger as a positive catalyst for Optus because it should boost long-term margins. It is perhaps worth noting that Optus’s mobile margins have plummeted from around 40% in 2005 to around 27% today due to increased competition from Vodafone (subsidiary VOD LN, £1.26, Underperform, TP: £1.25) and Hutch (HTA AU, A$0.10, OP, TP: A$0.17). Rationalization of market structure is a “game changer,” and we expect the outlook to improve from here on.
• Recessionary conditions, the effect of the government’s broadband project (NBN) and potential pay-TV price competition are key issues for the Singapore market. We think the NBN project is likely to be a non-event and argue that threats from new entrants (like MobileOne M1 SP, S$1.57, OP, TP: S$1.75) remain low. We arrive at this conclusion based on our assumption that NBN retail pricing is likely to be around S$70/user, which is significantly higher than most of the prevailing broadband price plans. The market may not be big enough for new entrants due to the limited market size – we estimate that only a small part of the broadband user base (~13%) currently subscribes to broadband plans with speeds >10Mbps.

Singapore National Broadband Network – likely to be a non-event with SingTel’s win
In our recent meetings, we found that some investors were concerned about the effect of the national broadband network on SingTel’s businesses. In particular, some view NBN as a positive catalyst for No. 3 player MobileOne and a negative for incumbents SingTel/StarHub because it gives them the opportunity to bundle services.

Control of the NBN project is far-more important for SingTel than for StarHub, because it needs to mitigate risks to its corporate revenues and also secure its technology roadmap beyond the current theoretical limits of its ADSL 2+ network (25Mbps).

The project is divided into two phases and a SingTel consortium has already won the first phase, called NetCo. The results for tenders of the second phase will be known in 1Q09, and we expect SingTel to win the project with wholesale pricing of around S$15/residential sub.