Return of the prodigal: SingTel’s Optus could be on its way to recovery

SingTel pours $1.4b into struggling subsidiary.

The black sheep is coming back into the fold. Recent upgrades by SingTel’s Optus are set to bring the SingTel subsidiary onto a better earnings path starting FY16.

This is welcome news for SingTel, which has allotted $1.4b for Australian mobile expansion in 2015.

Optus’ updated My Plan Plus mobile plans offers significant increases in data allowances while remaining significantly cheaper compared to Telstra, its leading competitor.

This move is seen as Optus’ effort to regain its footing in mobile phone subscriptions after it lost 160,000 mobile subscribers in FY14 across both prepaid and postpaid bases.

According to the CIMB, “We noted in our review of SingTel’s FY14 result that Optus’s recent and proposed network expansion and the use of 700MHz spectrum to expand regional coverage, would likely place Optus on a stronger earnings path from FY16.”

Here’s more:

We see competitive pressure in the Australian mobile market increasing through
FY15, slowing industry mobile service revenue (MSR) growth. We think MSR is
likely to pick up from FY16 with growing use of devices, M2M and data usage.

Although we think Optus will do well to hold the network differential between it
and Telstra at current levels through FY15, we expect it will be in a stronger
position to win back share at the premium end of the mobile subscriber market by
FY16.

We continue to like SingTel as an investment and retain our Add rating and
SOP-based S$4.10 target price. Key risks are mobile competition in Australia from
Telstra and VHA and Optus’ execution of its network rollout.