Singtel's Optus poised to benefit from rival Telstra's outages

Telstra suffered from 3 mobile network outages after a software fault.

Singtel's Optus is poised to benefit at the expense of its rival Telstra following the three outages endured by its mobile network in Australia this May, UOB Kay Hian said.

According to a report, Telstra' announcement that its mobile network was down in six cities has caused many customers in Australia to experience difficulties making calls and connecting to the Internet. It failed to switch over from faulty equipment to backup equipment on standby. 

UOB Kay Hian analyst Jonathan Koh noted that investigation is still on-going to identify the root cause of the software fault. "Telstra’s group managing director of networks, Mike Wright, explained that a fault in its core network caused problems with connectivity at the 4G layer of its mobile network at around 10 a.m. All its customers had to connect to the 3G layer, which caused a huge shift in traffic. Customers suffered dropped calls and intermittently lost service as the 3G layer was overloaded."

As a result, many customers were inconvenienced and disappointed. "Many Telstra customers aired their frustration on social media. Many customers threatened to switch to rival operators," Koh added.

Consequently, the "widespread disappointment" caused by the series of three nationwide outages suffered by Telstra in May is likely to result in consumers flocking to Optus in the first quarter of 2019, the analyst said.

Optus is the largest contributor to Singtel's earnings accounting for 28.5% of group before-tax profits in Q4. Optus also gained market share with a net addition of 101,000 post-paid mobile customers, whilst post-paid ARPU was also stable at A$44. 

Koh suggests that Optus has adopted the right strategy in Australia. Firstly, it raised capex over the past three years to enhance the breadth and depth of its coverage. "Optus has accelerated its rollout of 4G in metropolitan and regional areas after the release of 700MHz frequency spectrum on January 2015. It utilises its 700MHz spectrum to extend coverage to fringe cities in rural areas and aims to achieve a market share of 30% for rural areas," he said.

It was also able to differentiate itself through its content. "Optus maintains sticky customer relationships and differentiates by bundling mobile, fixed broadband and entertainment offerings. It offers captivating content, such as English Premier League (EPL), National Geography (NatGeo) and Cricket Australia," the analyst added.

Separately, the company's board intends to maintain ordinary dividends at 17.5 cents for the next two financial years and, thereafter, revert back to paying 60-75% of underlying net profit. "We see the promise as a demonstration of management’s confidence that group earnings would not be unduly affected by increased competition in Singapore and Australia," Koh concluded.