SingTel - 3QFY17 Tracking forecast but Optus is a worry
- Results largely in line, with 9MFY17 core net profit at 78% of our FY17 forecast.
- Singapore earnings grew on lower opex and narrower DL losses. Higher associate earnings were driven by Telkomsel and Globe.
- Optus earnings fell on keen competition and higher device subsidies/content costs.
- We cut FY18-19F EPS by 8-11% to factor in lower earnings at Optus and Bharti.
- Maintain Add with 9% lower target price of S$4.10. Attractive yields of 4.6-4.9%.
3QFY17 results largely in line despite weaker Optus
- Singtel’s 3QFY17 core net profit rose 4.2% yoy (+1.6% qoq). This was largely in line, with 9MFY17 at 78% of our FY17 forecast (consensus: 75%).
- Singapore profits were up 7.6% yoy while associate earnings rose 6.1% yoy. This was partly offset by lower profits at Optus (-12.7% yoy). In constant currency terms, core net profit was up 2.5% yoy.
- Singtel still guides for FY17 revenue to fall by low single-digit and stable EBITDA.
Singapore: Up due to consumer growth and narrower Digital Life’s (DL) losses
- Singapore EBITDA was up 1.6% yoy (-8.6% qoq) in 3QFY17. Consumer EBITDA rose 6.2% yoy due to lower staff and traffic cost. Enterprise EBITDA fell 4.3% yoy, with higher revenue more than offset by a 1.8% pts drop in margin (cyber security/ICT investments, mobile acquisition/retention cost).
- Digital Life’s (DL) negative EBITDA narrowed 29.1% yoy to S$23m.
- Core net profit in 3QFY17 was up 7.6% yoy (-10.0% qoq), boosted by lower depreciation and net interest cost.
Optus: Weaker quarter on higher cost but strong mobile net adds
- Optus’s service revenue fell 14.2% yoy (-0.4% qoq) in 3QFY17 on lower mobile revenue (-21.8% yoy) due to termination rate (MTR) cuts since Jan 2016.
- Postpaid subs grew by another strong 90k qoq (+1.9%), driven by differentiated content offerings (EPL), while prepaid users rose 43k qoq (+1.2%).
- Blended ARPU was down 22.7% yoy (ex-MTR changes: flat yoy), but steady qoq.
- EBITDA fell 5.2% yoy (+2.7% qoq) on higher device subsidies and content cost.
- The margin rose 1.3% pts yoy (-0.5% pts qoq) to 29.5%.
Associate earnings: Improvement led by Telkomsel and Globe
- Associate contributions in S$ improved 6.1% yoy due largely to Telkomsel (+30.7%) and Globe (+53.4%).
- Qoq, associate earnings fell 2.6%, led by Bharti (-47.5%), partly buffered by higher earnings at AIS (+14.9%).
- 9MFY17 associate earnings were slightly ahead of expectations at 78% of our FY17 forecast.
FY18F-19F core EPS cut for lower Optus and Bharti earnings
- We tweak our FY17F core EPS by +1.0% after the 3QFY17 results and cut FY18F/19F core EPS by 8.2%/11.2%, mainly to factor in lower earnings at Optus and Bharti. Post revision, we forecast Singtel’s core EPS to be flat in FY17F and inch lower by 1.5% in FY18F.
- We expect earnings to be flat in Singapore and to fall at Optus, given heightened competition and rising depreciation due to high capex. We then see 6.5% yoy growth in FY19F due to Optus recovery and continued growth at associates.
Maintain Add call with 9% lower SOP-based target price of S$4.10
- We keep our Add call with 9% lower SOP-based target price of S$4.10, after factoring in lower fair values for Optus, AIS, Bharti and Globe.
- Singtel’s FY18F EV/OpFCF of 19.4x is at a 15% premium over the ASEAN telco average, supported by attractive FY17-19F yields of 4.5-4.9%.
- A potential re-rating catalyst is the declaration of a special dividend after the IPO of NetLink Trust.
- Downside risk is more intense competition in Australia, India and Singapore.
- Singtel is our preferred Singapore telco pick.