Singtel to splurge $1.6b to boost lagging Optus

Optus needs to spend more to earn more.

Singtel is expected to embark on a massive capex hike to give lagging Optus a better fighting chance against aggressive Telstra.

According to a report by Nomura, Singtel is expected to increase Optus’ FY16 capex to $1.6b (AUD1.5b) from its historical level of $1.2b (AUD1.1b).

“We have long argued that Optus needs to spend more in order to earn more. There is a fair bit of network gap with Telstra, which has consistently spent ~3x more than Optus on networks and has gained much more share. Moreover, with Singtel/ Optus’ rising focus on digital services, it needs to boost networks further,” stated Nomura.

The increased capex guidance is expected to be unveiled at the next full-year result in May 2015. Nomura notes that even with this increase, there will still be sufficient free cash flow to fund Singtel’s dividends.

“This, if and when happens, is a good thing, we think. As seen with Telstra (and with some of Singtel’s own associates), higher capex on better networks can lead to better customer share, better pricing power, lower churn, and improving margins for some. Optus’ performance is key to Singtel’s earnings, cash flows and the share price. We think 2015 could be the year when Optus starts turning around,” noted the report.