Telcos need more cash to buy spectrum

Telco bids may rise up to 20% over the price M1 paid for the last 1800MHz auction, says MayBank KimEng.

Here's from Gregory Yap, analyst at MayBank KimEng

Spectrum is a scarce national resource, and having more is always better than not having enough. Hence, we think each of the telcos will want to make sure they get their fair share of the pie even if there are no new entrants and their bids are rational. In every scenario we looked at, we think that capex will rise in 2013.

Since there is not enough spectrum available for complete replacement of the telcos’ existing bandwidth, but given the need to avoid a price escalation for everyone, we have assumed that SingTel and StarHub will bid for 2x25MHz (full replacement) while smaller M1 may go for a lower 2x20MHz as it has more 900MHz bandwidth that can be redeployed for 4G. It is unlikely that SingTel will settle for less given its deep pockets.

Using past pricing for 1800/1900MHz spectrum auctions achieved in 2010 and 2011, StarHub may have to pay about SGD110m for the 1800MHz spectrum, which could increase 2013 cash requirements by 43%. Assuming borrowings are used to fund the additional commitment, its 2013 forecasted net debt/EBITDA could rise from 0.63x to 0.78x. This is still a reasonable gearing level.

On a worst case scenario where every telco bids for complete replacement and drives up the price by 20% over the price M1 paid for the last 1800MHz auction, StarHub may have to pay up to SGD131m. This may happen if IDA does not increase spectrum allocation. In this case, StarHub net debt/EBITDA could rise to 0.81x. However, we deem it as a low probability scenario as M1 is unlikely to have the financial muscle.