Singapore Telecommunications - UOB Kay Hian 2016-08-12: 1QFY17 Growth From Associates, Catalyst From Turnaround In A$

SINGTEL Z74.SI

Singapore Telecommunications (ST SP) - 1QFY17: Growth From Associates, Catalyst From Turnaround In A$

Singtel’s 1QFY17 net profit of S$954m (+6.6% yoy) was slightly above our expectation. Telkomsel and Bharti Airtel outperformed with earnings contributions increasing 31% and 5.1% yoy respectively.
Regional mobile associates provide strong organic growth from emerging countries. The turnaround in A$ is another catalyst. Singtel offers a defensive fortress and a decent dividend yield of 4.4%.

Singtel's net profit of S$954m for 1QFY17 was slightly above our forecast of S$941m.

For Singapore, revenue from mobile, IDD and national telephone declined 1.4% yoy, 18.5% yoy (-11% yoy excluding one-off credit of S$5m last year) and 5.5% yoy respectively. Singtel added only 2,000 post-paid subscribers due to termination of 25,000 inactive subscribers on rationalisation of legacy data plans. Post-paid ARPU was stable at S$70/month, held back by lower voice, SMS and roaming revenue. The decline in IDD and national telephone reflects data substitution. EBITDA increased 0.5% yoy due to cost rationalisation.
Optus’ mobile revenue declined 19.7% yoy in constant currency due to reduction in mobile termination rate (MTR) effective 1 Jan 16. It added 58,000 branded handset customers. Blended ARPU increased A$1 or 2.5% yoy, adjusted for changes in MTR and device repayment plan. Its NBN customers grew 23,000 qoq due to increased take-up for Optus TV. Staff costs decreased 8.1% yoy with the reduction in headcount. EBITDA increased 2% yoy in constant currency but growth was negated by a 3.1% yoy depreciation in the A$ against the S$.

Revenue grew 5.1% yoy due to contribution from cyber security (classified under ICT) of S$109m. In Singapore, Data & Internet revenue grew 3.1% yoy. Revenue from Australia declined 1.8% yoy in constant currency. TrustWave contributed negative EBITDA of S$5m, thus, EBITDA grew by a slower 1.4% yoy.

Amobee’s advertising revenue from mobile, video and social media grew 30.4% yoy. It introduced video advertising campaigns on Twitter and secured new customers Honda and Philips. EBITDA was stable at negative S$36m.

Telkomsel added 3.8m subscribers in 1QFY17 and its subscriber base expanded 9.2% yoy. It has 76m data customers, which accounted for 48.3% of its subscriber base. Operating revenue grew 14.5% yoy, driven by voice (+4.4% yoy) and data (+45.7% yoy). EBITDA increased 21% yoy despite higher operation and maintenance costs from the accelerated network deployment. PBT grew 32% yoy with a mild 0.3% depreciation of the rupiah against the S$.
Bharti added 4.5m subscribers and its subscriber base expanded 11% yoy in India and South Asia. Operating revenue grew 10% yoy, driven by data traffic (+55% yoy) and data ARPU (+12% yoy). EBITDA surged 17% yoy on tight control in operating expenses.
Revenue from Africa rose 2% yoy, driven by data and “Airtel Money” services. Data revenue grew 31% yoy due to higher usage and data penetration. EBITDA increased 12% yoy due to cost efficiencies. On a group basis, PBT increased a slower 5.1% yoy due to higher interest expense, fair value losses and a depreciation of 4.2% in the rupee against the S$.

Maintain guidance for FY17. Revenue and EBITDA are expected to grow at low-singledigit on a group basis.

We raise our net profit forecasts by 0.4% for FY17 and 0.6% for FY18 to factor in appreciation of the A$ against the S$.

We have performed a scenario analysis based on two possible outcomes: Best case - no new entrant, and worst case - a fourth mobile operator disrupts the status quo. We attribute a probability of 25% for the best case and 75% for the worst case.
Our probability-weighted target price is S$4.70 (best case: S$5.02 (previously S$4.51), worst case: S$4.61 (previously S$4.38)). The risk-reward trade-off is favourable with potential upside of 8-17.6%.

Singtel is the least affected by a fourth mobile operator in Singapore as overseas businesses account for about 70% of its bottom line.
Singtel will benefit from growth at its regional mobile associates.
Singtel is the largest and most liquid defensive stock listed on the Singapore Exchange and deserves to trade at a premium.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-12

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.70 Up 4.380