Investment thoughts: Singtel

I can understand the IDA’s need to allow a fourth vendor into the Mobile Network Operator MNO scene. As a country committed to the interconnected internet of things future, Singapore can ill afford to allow incumbent infrastructure service providers dictate the level of service or pricing for wireless internet. Lower pricing will increase the level of adoption of future tech, which is what the IDA needs to drive its vision.

This sets the stage for the current telco environment, how does a change in government policy lead to competitive disruption? Who will be the ultimate winners?

Technology as a differentiator

Mobile networks have always offered MNOs a profit in the mid-teens. There was no reason to change the pricing structure, even if some segments were underutilizing it. The advent of MVNOs who developed technology to track data usage and tap into consumer buying patterns to cater to the different segments, changed the game fundamentally.

Right now, MNOs are struggling to keep their existing users while avoiding offering wholesale discounts. I think that the market needs more time to stabilize, as more customers try out the different offerings.

Dwindling sources of revenue for MNOs

MNOs are also struggling as their traditional revenue sources are being rendered obsolete. Non-renewal of landlines and cable TV subscriptions are increasing and it’s not hard to foresee the day where customers would be willing to forgo caller ID, phone calls and SMS for a larger data bundles. That said, MNOs are still able to provide a wider range of solutions to consumers compared to pure mobile only MVNOs, the enterprise solutions market is also likely to remain stable or grow as companies require higher data speeds due to adoption of more cloud computing solutions.

MVNOs are fast replacing MNOs

MVNOs are not new (remember Virgin mobile?) and are unlikely to replace MNOs as they merely borrow infrastructure. The difference lies in the service differentiation and giving customers more choice. MNOs are still needed as they are the ones paying for and upgrading the underlying systems. If anything, this slugfest is only going to weaken all other MNOs other than Singtel, who is not as dependent on sg mobile subscription for revenue. I really can’t see how M1 or Starhub is going to pay full dividends while rolling out the next 5G network.

Too many players?

Despite the rapid growth of MVNOs their ARPU is actually very low. Probably lower than MNOs who sell them their networks, this situation is unhealthy and more important to investors likely temporary. At some point they will start tinkering to see what features they can start charging customers more for without increasing customer turnover.

Conclusion

The elephant in the room is this, data consumption is going up, but the average price of data is also going down rapidly. Who is going to pay for it? I think it’s inevitable that MNOs will one day raise underlying prices for MVNOs and that prices converge more rationally.

ESR merges with Viva

I feel somewhat mixed at this outcome, positive as I knew that this was inevitable for both Reits. However, I thought that the ESR management should have held out more for a better deal for unitholders. The deal would have been much more accretive for the ESR unit holders, if it had been done more swiftly. The positivity at the beginning of the year has started give way to fear of rising interest rates.Overall, the street does not seem to be favoring companies with high debt levels (Reits, Thai Bev, etc).

Once the news was out, I spent the weekend thinking how the street would price both shares. My initial thoughts were that both would race towards the offer price of S$0.96 for Viva and S$0.54 for ESR. However this has not played out, with both ranging near pre-merger prices.

For Viva Unitholders, this would seem like a good conclusion for them. At an offer price of $0.96, it means that most can easily let go of their shares, which I suspect they are doing with glee. Though not exactly a windfall, at least they would not have to worry about the stop of the income stabilization or short land leases anymore.

For existing ESR unitholders, there is not have much to be happy about considering how DPU is likely to continue sliding in 2018. I feel that the management really does have a lot to prove, with this deal being at best, a status quo for the Reit. While I continue to believe in the general strategy, I feel that the earliest we can see it bear fruit is in 2019. The income visibility till that date is hazy at best. I do hope the management will continue to divest non-core assets and leverage on AEI’s to improve investor returns.

ESR+Viva Portfolio
Enlarged Reit Portfolio

As interest rates continue to go up, leveraged income stocks like Reits will continue to trail the street. Only a those of an appreciable size and solid credit rating will be able to command lower interest premiums. I’m keeping my bets on ESR intact and hope to accumulate more if price weakens below S$0.5.