Singtel - RHB Invest 2016-08-12: Cost Discipline Amidst Weak Signals

SINGTEL Z74.SI

Singtel - Cost Discipline Amidst Weak Signals

We remain NEUTRAL on Singtel post 1QFY17 (Mar) results call. Key takeaways were:
1. The group-wide cost focus;
2. Potential capital management from NetLink Trust sale (by Apr 2018);
3. Continuing mobile headwinds in Australia/Singapore.

We lift the SOP-based TP to SGD4.00 (from SGD3.70, 5% downside) after updating our valuations on listed associates and core earnings revisions for FY17F-19F of 2%, -0.4% and 9.6% respectively.
We think valuations are already fair, at 11.1-11.5x FY17F/18F EV/EBITDA after the 17% outperformance against the STI YTD.

We expect mobile revenue momentum to remain weak on the back of ARPU dilution from SIM-only plans and structural roaming revenue pressure.
Singtel is more pre-disposed to roaming revenues pressure, given the larger proportion of mobile revenue from roaming services at 21% vs the 10-15% of its peers.
Postpaid ARPU fell 5.4% YoY to SGD70 and flat sequentially.
Domestic EBITDA margins expanded to 38.5% from 31% in the preceding quarter on seasonality and lower traffic costs.

We gathered from management that underlying mobile service revenue (MSR) momentum remains “positive” after excluding the impact of lower mobile termination rates (MTR) and despite stronger competition from Telstra (TELS AU, NR). This suggests that Optus continues to gain revenue market share, supported by the wider 4G footprint (1QFY17 (Mar): 95% population coverage) and the upgrade of additional 4G sites to 700MHz band, which has better propagation.
Optus added 251,000 4G subscribers (subs) to 4.87m in the June quarter, or 52% of total mobile subs. We expect the robust subs momentum to continue with the introduction of English Premier League (EPL) content in July, providing greater value proposition to subs. The lower MTR has led to lower traffic cost (1QFY17: -49.2% QoQ), which alongside seasonally lower marketing cost contributed to stable EBITDA despite the 20% YoY decline in MSR in 1QFY17.

Singtel expects its digital servcies revenue to grow ahead of the industry’s 10-15%. We expect GDL losses to expand in 2HFY17 before narrowing in FY18 (FY16 EBITDA: - SGD137m) on the back of economies of scale and the continuing robust growth in mobile advertising (under Amobee), which grew 9.2% QoQ.

Singtel’s share price (+19% YTD) has outperformed the Straits Times Index (STI) by 17% YTD, helped by the yield compression theme, the relatively stable SGD/AUD over the past six months and its smaller exposure to the domestic mobile market – hence, less vulnerable to potential fourth player risks in the market.
We think valuations are fair at 11.1-11.5x FY17F-18F EV/EBITDA with prospective (FY17-18) dividend yields of 4.2%.
Forex, higher-than-expected capex and stronger-than-expected competition in Australia and Singapore are key risks to our call.

Singapore Research Team RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-12

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