TPG may not be a game changer for Singapore telco market

A DRAMATIC scene in J R R Tolkien's The Fellowship of the Ring has the heroes trapped in the caves of Moria, with a grim ledger warning of an advancing orc horde. "The end comes," their guidebook warns. "Drums, drums in the deep . . .They are coming."

Singapore telcos may be expected to be in a similarly dreaded position, as Australia's TPG Telecom gears up to enter the market at some point this year.

M1 warned in its quarterly results that it foresees a slip in second-half profits "in view of market seasonality and impending new competition".

DBS analyst Sachin Mittal believes that the entry of TPG and various network-leasing mobile virtual network operators (MVNOs) could cause an annual revenue share loss of 1.3 per cent through 2022 for M1, and a 2.5 per cent drop for StarHub.

But StarHub's new chief executive Peter Kaliaropoulos told a recent earnings call that "we don't expect the fourth MNO to be fully operational by year-end", with competition to be felt only from 2019. So, are concerns over a crowded market warranted?

Unlike new entrants Circles.Life and MyRepublic, TPG will come in as a full-fledged mobile network operator (MNO), complete with infrastructure assets. It has more heft than ill-fated Virgin Mobile - which pulled out in 2002, barely a year after joining the fray. Virgin Mobile was not an MNO, but an MVNO partnering Singtel.

But even if TPG lands in Singapore with the hardware to back a wider slew of products and services than MVNOs can offer, there is no reason for the incumbents to panic.

Analysts have been looking somewhat askance at TPG's gearing of late, with the telco also pressured by spectrum bids Down Under. Bloomberg Intelligence noted in June: "The company is contending with a margin squeeze from a state-owned broadband network, a record-high capital-spending budget for its Australian home market, and investment in Singapore's crowded mobile business."

TPG had bank debt, net of cash, of nearly A$1.4 billion (S$1.4 billion) as at Jan 31, for a leverage ratio of about 1.7 times its Ebitda (Earnings before interest, taxes, depreciation and amortisation).

This was after the group inked new debt-facility agreements, which it said was to finance planned mobile network builds.

While TPG has said that the projected capital expenditure on its Singapore mobile network "remains in line with original forecasts", it may also have to spend heavily to gain a toehold in the Republic.

Beyond the infrastructure outlay, it will be running some services at a hefty discount, such as its advertised zero-dollar, two-year plan for senior citizens. Whether or not that is just a marketing gimmick, price wars don't come cheap.

"TPG is possibly targeting low-cost roll-out by focusing on government-linked buildings and could lease assets from NetLink Trust. Our analysis indicates TPG could manage costs by adopting a largely digital strategy. TPG could also build a more efficient 4G network, which would benefit its cost structure," J P Morgan analysts noted in an early August projection of TPG's possible entry strategy.

But they added: "Our deep-dive into the network roll-out strategy and the cost structure of a new entrant indicates that while a new entrant could initially be price disruptive, IRR (internal rate of return) requires price rationalisation in the mid-term."

J P Morgan has a "neutral" rating on Singtel, with analysts citing new-entrant risks, earnings and dividends as potential drags.

Still, as Singtel chairman Simon Israel pointed out at the company's annual general meeting last month, the telco is no stranger to the competition: Its Optus subsidiary has already gone toe to toe with TPG in Australia.

All told, the outlook for Singapore's telecoms sector remains mixed, if not uninspiring. Maybank Kim Eng's Luis Hilado said in July that the house is adopting a "wait-and-see mode" in keeping a "hold" call on M1.

Until TPG actually launches in Singapore, The Battle of the Four Telcos - to borrow and adapt from another Tolkien's classics - remains in Akan Datang, or Coming Soon mode.