SingTel - In a Better Position
- Singtel is our Preferred telco Pick as its revenue/EBITDA exposure from the domestic market is markedly lower vs peers. Hence, it should be relatively shielded from the shift into a four player market.
- The group’s regional mobile assets should continue to be the key earnings driver, underpinned by strong data growth and smartphone adoption.
- The premium valuations (13x FY17F EV/EBITDA) reflect Singtel’s significant market capitalisation and exposure to higher yielding regional assets.
- Maintain NEUTRAL on heightened competition in Australia and India.
Best positioned to withstand fourth operator woes.
- Singtel would be the least impacted from the entry of a fourth operator in the market, as over two- thirds of the group’s EBITDA is derived from outside of Singapore.
- For 1HFY17 (Mar), Singapore consumer EBITDA (where its mobile segment is parked) made up some 11% of overall group EBITDA (including share of associate profits).
- We gather the response to its data upsized plans – Data X2 (introduced in Mar 2016) and more recently, Data X3 – has been good. We believe Singtel is well positioned to fend off competition from the new entrant, which will take some time to roll out its network.
- While overall industry mobile revenue contracted 2% YoY in 9M16, Singtel’s mobile service revenue trumped its peers, posting a marginal 0.9% decline vs StarHub’s (STH SP, NEUTRAL, TP: SGD3.15) and M1’s 3-4% contraction. This was largely supported by the strong data revenue growth that had partially offset the structural erosion in legacy voice and roaming revenues.
Regional associates remain the bright spots.
- Contributions from regional mobile associates rose 7% YoY in 2QFY17 and 11.5% YoY in 1HFY17, led by Telkomsel and Bharti Airtel’s (BHARTI IN, NR) +22% and +13%.
- We expect both operating companies (OpCos) to remain the key earnings drivers for the group going forward, supported by strong data revenue growth in the respective markets.
Enterprise is looking smart.
- Singtel is well poised to capitalise on the opportunities in the enterprise space. It is a major player in the smart nation initiatives in Singapore and Australia (via Optus).
- Group enterprise revenue would be supported by the cyber security business (Trustwave), Government infrastructure projects and on-boarding of Government agencies on the G-cloud platform, which should more than offset the decline in legacy carriage revenue.
- Our SOP valuation of SGD4.00 implies 13x FY17F EV/EBITDA, at the higher end of its EV/EBITDA trading range of 10-14x over the past three years.
- Singtel trades at a premium to its domestic peers (average 7x FY17F EV/EBITDA) and regional peers of 7-8x, given its significantly larger market capitalisation and exposure to high yielding regional assets.
- Key risks include stronger-than-expected competition at the various OpCos, forex volatility, extended gestation periods at its new digital businesses, and higher-than-expected capex.
- Upside risks would be higher-than-expected dividends and stronger-than-expected improvement in economic activities driving stronger traction of the group’s enterprise business.