Singtel not in position to speculate on capex for 5G in Singapore, says CEO

Annabeth Leow

Published Wed, May 15, 2019 · 05:20 AM

SINGTEL management took the group's sprawling portfolio through its paces at an hour-long earnings briefing on Wednesday morning, after the mainboard-listed telco posted a 21.4 per cent drop in full-year earnings - shorn of one-off items - to S$2.83 billion.

With the recent release of an Infocomm Media Development Authority (IMDA) consultation on May 7, the planned rollout of fifth-generation (5G) mobile technology sparked questions from the press on any ramp-up capital expenditure (capex) - which Singtel has projected to come in at S$2.2 billion in the coming year, largely on the back of the Optus subsidiary in Australia.

Compressed margins and market competition also took centre stage, particularly as various credit ratings agencies have flagged and fretted over Singtel's debt-to-earnings ratios of late.

5G: Too early to speculate

Moody's, which had cut Singtel's senior unsecured ratings down to "A1" - a notch below "Aa3" - in 2017, lowered its outlook on the company from "stable" to "negative" in March.

But Singtel group chief executive Chua Sock Koong told the press on Wednesday: "We have one of the strongest credit ratings amongst telcos... I believe the numbers speak for themselves, looking at our overall gearing levels and our free cash flow generation."

Free cash flow for the full year was S$3.65 billion, with net debt gearing of 24.9 per cent.

Ms Chua also said that "we are not in a position to speculate on what the capex could be" for 5G in Singapore, as the IMDA has yet to determine specific network and market requirements.

"You know, spectrum availability will not be until calendar year 2021 - in which case, the significant capex spending would only, for the Singapore 5G network, happen then," she said.

"We will continue to make investments in building our 5G use cases, before the big rollout, which will probably be more like the 2021 kind of timeline - assuming that we win the beauty contest, after the IMDA rules are finalised as to how 5G is going to be rolled out."

By "beauty contest", she was referring to the authorities' plan to call for proposals on 5G network development, with the spectrum to be awarded to two winning bidders.

Ms Chua added that Singtel's Australian unit, Optus, has already been rolling out fixed-wireless access 5G capabilities in that market, "so that capex programme continues... and the capex guidance that we have provided would include further 5G spend".

Mix and match

Mobile service turnover in Singapore fell by 2.1 per cent for the quarter and 3.8 per cent for the full year, with average revenues per user (ARPUs) lower for both post-paid and pre-paid mobile.

Singtel said in its financial statements that post-paid ARPU was down by 9 per cent year on year, to S$41, on higher penetration of SIM-only plans and lower data prices, even as the pre-paid customer base shrank amid migration to post-paid SIM-only plans.

When asked about the SIM-only and unlimited data options that have hit the market - a calling card of mobile virtual network operator (MVNO) rivals - Yuen Kuan Moon, who oversees the Singapore consumer business, argued that "it's not just purely looking at data plans".

"We have a combination of different mobile plans to provide, to satisfy the needs of the various segments of the market. Moreover, if you look at some of the bundled plans, we are not only just offering a large data bundle, but we are also offering it with content," he said, highlighting mobile consumer products at different price points, such as HBO pay-television bundles and a diversity of plans from Combo XO to the no-frills GOMO.

"We definitely know that data is very important to all our customers, and, of course, to have data you need first to have a very good data network, to be able to provide that coverage and the capacity to absorb the data," he added.

"So, from a service perspective, we do not just follow the market trend by just offering cheap data plans and unlimited data plans, because that's probably only one segment of the market."

MVNO Circles.Life, which leases frequency from recently privatised network operator M1, has in the past patted itself on the back for contributing to M1's subscription numbers.

On whether Singtel feels uplift from its own MVNO partners, such as Zero1 and Zero Mobile, Mr Yuen said that "it's always a business relationship where we work very closely with them".

"I think they are providing a good service to one segment of the market. On the wholesale portion, we are working closely with them to see how they can enlarge penetration in that segment," he elaborated.

He added: "As a group, we look at competition very seriously, whether it's a mobile network operator or a mobile virtual network operator. We look at where they compete, under which segment, and how they are addressing the market... In Singapore, I think there is a vibrant MVNO market, including Circles.Life, one of the early starters...

"We also believe that, to our knowledge, there will be a few more MVNOs about to start in the next few months, so we're going to see even more MVNOs coming into the market to create a very vibrant marketplace."

But, when asked about Circles.Life's plans to venture abroad - into regional markets, such as Australia and Indonesia, where Singtel already has a footprint - Mr Yuen said, without naming names: "When you're going into overseas markets, firstly, Indonesia, there is no MVNO licence per se, so I'm not sure how an MVNO can operate in a country where there is no such licence.

"I think, in Australia, there are also a lot of MVNOs currently in play.

"So we'll just have to see how they can find themselves a niche."

Regulators Down Under last week moved to block a planned merger between Vodafone and MVNO TPG Telecom, which has entered Singapore as a fourth network operator.

"TPG-Vodafone entity would have been more formidable and by blocking this, Optus could potentially benefit from having retained a stronger network position," Citi analysts wrote in a sector report after the news.

Meanwhile, JP Morgan analysts suggested that TPG could call it quits and try to sell its spectrum rights, but even if it does try to build its own network, Singtel's Optus may not take a hit "as balance sheet constraints could limit TPG's network build".

Murray King, chief financial officer for Optus, noted on Wednesday that the two Australian telcos want to take their appeal to the courts.

"In the interim, obviously, this merger has been afoot for some time," he said, but added that "we continue to execute and invest in our strategy", such as by building a "premium network" and winning over small and medium-sized enterprise clients.

Singtel's fledgling digital life segment saw double-digit revenue growth, but also posted widening losses before interest, tax, depreciation and amortisation to the tune of S$92 million for the 12 months - dragged down by video-on-demand streaming service Hooq and other assets.

But Samba Natarajan, the digital life head, maintained that "we are encouraged by the growth".

"Hooq's operating business continues to grow, and well," he said, while referring the press to app download figures as "we don't disclose actual numbers" for user subscriptions. "The revenue generated has more than doubled over the past year... so the growth is quite optimistic."

Meanwhile, Singtel's enterprise revenues slid by 2.7 per cent for the quarter and 2.3 per cent for the full year, with DBS telecom analyst Sachin Mittal arguing on Monday that the segment would still face pressure in the next 12 months, as legacy carriage operations like voice services are "unlikely to be adequately offset by growth in the ICT (infocomm technology) business".

But Bill Chang, head of group enterprise, noted that ICT contributions have crossed the halfway mark: 51 per cent of enterprise revenue for the fourth quarter, against 48 per cent for the year prior.

"Just maintaining our position in the core carriage will not be sufficient to sustain value and we have to invest in growing ICT - and, especially, the newer version of ICT, which is digital ICT services," he told the briefing.

"We are investing a lot in cyber, in cloud in areas of analytics, and investing more in our labs, so that we can really position ourselves when a lot of the enterprises move into this digitalisation journey, when Smart Nation moves a lot more into these digital opportunities...

"All this will be in the low to mid-teens kind of margins, so you will expect ICT as a growing mix of the overall business. It's a case of managing the costs in this transition."

Emergency exit?

DBS's Mr Mittal had also suggested in his report that "a partial exit from digital businesses" could be a catalyst for the stock, writing: "Singtel is open to exit opportunities over the next two years for the digital businesses via a sale to a strategic investor or public listing."

Ms Chua, when asked about divestment considerations, offered "just a general comment".

"We have built up a portfolio of digital assets. We see them as providing future growth for the group," she said, citing revenue growth from Amobee and Trustwave.

"We are continuing to ramp up these businesses. Whether it makes sense for whatever reason to bring it to other investors is something that we'll look at on a case-by-case basis.

"If we think that it is value-enhancing, clearly, we'll be prepared to look at this. But I think that the focus of the management team is clearly in executing the business well."

Meanwhile, on industry consolidation, Ms Chua described Singtel as "always open to consider strategic initiatives if we think that those initiatives are value-accretive for shareholders".

She noted that the board would evaluate the options on the table "if there are interesting offers or if there are proposals".

Still, she added that a primary factor in telecom deals "would always be what the regulators' views are - and there are always significant levels of concerns around what an in-market merger will do, reducing competition".