Singapore Telecommunications (ST SP) - UOB Kay Hian 2016-11-11: 2QFY17 Telkomsel And Bharti Airtel Provide Growth

Singapore Telecommunications (ST SP) - UOB Kay Hian 2016-11-11: 2QFY17 Telkomsel And Bharti Airtel Provide Growth SINGTEL Z74.SI

Singapore Telecommunications (ST SP) - 2QFY17 Telkomsel And Bharti Airtel Provide Growth

  • 2QFY17 results were in line. 
  • Higher contributions from regional mobile associates and reduced losses from Digital Life compensated for lower contributions from consumer businesses in Australia. 
  • Singtel provides resiliency due to its defensive telco businesses diversified across six countries. The stock provides an attractive dividend yield of 4.8%. 
  • Maintain BUY. Target price: S$4.53.


RESULTS

  • Singtel reported net profit of S$978m for 2QFY17 (+0.4% yoy), in line with our forecast of S$980m. This is a good set of results among peers (M1: -23.4% yoy, StarHub: -27.5% yoy) and given the subdued economic environment.

Group Consumer: Subdued performance. 

  • Singtel’s post-paid subscriber base expanded 1.9% yoy in Singapore. Post-paid ARPU eased S$1 qoq to S$69. Contribution from data increased to 45% (2QFY16: 39%) of ARPU. Mobile revenue was flat yoy despite less contribution from local and roaming voice.
  • Optus’ mobile revenue declined 20.8% yoy due to the reduction in mobile termination rate (interconnect rate) effective 1 Jan 16. Blended ARPU would have increased by A$1 yoy to A$34 if we exclude impact from termination rate and device repayment plan credits.
  • Optus added a record 91,000 post-paid customers. EBITDA declined 9.2% yoy due to higher content cost with the launch of Optus Sports channels. Optus also experienced intensified competition in pre-paid mobile services from Telstra and MVNOs.
  • Nevertheless, EBITDA margin was maintained at 33%.

Group Enterprise: Growth from cyber security. 

  • Revenue from the data & internet segment grew 2% yoy. Cyber security specialist TrustWave contributed revenue of S$129m and EBITDA of S$3m. EBITDA margin narrowed by 2.1ppt yoy to 31.2% due to TrustWave’s higher cost structure.

Group Digital Life: Amobee continued to scale up. 

  • Amobee’s advertising revenue from mobile, video and social media grew 23.4% yoy. Negative EBITDA was reduced to S$27m. It introduced dynamic ads partnering Facebook and secured new customers Unilever, CapitalOne and Selfridges.

Regional Mobile Associates: 

  • Growth from emerging countries, driven by Telkomsel (+21% yoy) and Bharti Airtel (+12.6% yoy).
  • Contribution from NetLink Trust increased 42.4% yoy to S$39m due to the rapid migration to fibre broadband for NGNBN.


STOCK IMPACT


Refined guidance for FY17. 

  • Management guided that revenue from mobile business in Australia will suffer mid-teens decline (previously low teens) due to increased competition.
  • EBITDA for its core consumer and enterprise businesses are now expected to be stable (previously low-single-digit).
  • Singtel declared an interim dividend of 6.8 S cents, representing a conservative dividend payout ratio of 56%.

Prepared for protracted tussle with the fourth telco. 

  • Singtel launched attractive data upsize options to counter threats from the impending entry of a fourth mobile operator in Singapore. 
  • In September, it launched DataX3 which triples the data allowance for new and re-contracting customers at a flat S$9.90/month. This is a follow-up from DataX2 that doubles data allowance for S$5.90/month, which was launched earlier in March.

First mover in 5G. 

  • Singtel has entered into an MOU with Ericsson to study the future of 5G networks, exchange ideas and trials new technologies. The two companies have showcased 5G technologies that achieve peak data throughput of 27.5Gbps and low latency of 2ms.

Competition in India offset by growth in Indonesia. 

  • Reliance Jio Infocomm has secured 16m subscribers in October, within just a month after launch. Consumers are attracted to the “Jio Welcome Offer”, whereby services are free for 90 days until end-16. It is uncertain how customers will react once they have to start paying. Nevertheless, the company may extend the offer by another three months to maintain the positive momentum in customer acquisition.


EARNINGS REVISION/RISK

  • We maintain our earnings forecasts as 2QFY17 results were within expectations.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$4.53, based on DCF (required rate of return: 5.75%, growth: 1.2%). We have assumed a worst-case scenario whereby a fourth mobile operator disrupts the status quo.
  • Singtel is a strong defensive anchor should there be heightened volatility post the surprised outcome from the US presidential election.


SHARE PRICE CATALYST

  • 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 - Telkomsel in Indonesia, Bharti Airtel in India, Advanced Info Service in Thailand and Globe Telecom in the Philippines.
  • 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/ 2016-11-11
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.530 Same 4.530




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