Singapore Telecommunications (ST SP) - UOB Kay Hian 2017-02-10: 3QFY17 Rock Solid


Singapore Telecommunications (ST SP) - UOB Kay Hian 2017-02-10: 3QFY17 Rock Solid SINGTEL Z74.SI

Singapore Telecommunications (ST SP) - 3QFY17 Rock Solid

  • Singtel's 3QFY17 results were in line with expectations. 
  • The Singapore consumer business saw growth in broadband and pay-TV, as well as cost containment. 
  • For its regional mobile associates, Telkmosel’s mobile subscribers expanded 14% yoy while data revenue grew 28% yoy. 
  • The IPO of NetLink Trust could provide special dividends of up to 17.5 S cents/share and has to be completed by Apr 18. 
  • Maintain BUY. Target price: S$4.53.



RESULTS

  • Singtel reported underlying net profit of S$994m for 3QFY17 (+4.2% yoy), which is in line with our expectations.

Group consumer: Singapore stays resilient. 

  • For Singapore, mobile revenue was flat yoy with a 1.2% yoy expansion in post-paid mobile subscriber base offset by a 5.5% yoy decline in post-paid ARPU. Revenue from broadband and pay TV expanded 9% and 12% yoy respectively. EBITDA from Singapore Consumer grew a robust 6.2% yoy due to stringent cost control with expenses increasing moderately by a slow 2.6% yoy.
  • In Australia, Optus added a robust 90,000 post-paid mobile subscribers qoq. Mobile revenue contracted 22.1% due to reduction in mobile termination rate effective 1 Jan 16 and device repayment plan credits. According to management, blended ARPU was stable if we exclude impact from the above mentioned two factors. EBITDA in A$ declined 2.3% despite cutting expenses by 12.8% yoy (lower traffic expenses but higher costs of content). The poorer performance was mitigated by a 4.2% yoy appreciation in the A$.

Group Enterprise: Sowing seeds for Cyber Security. 

  • Revenue from Data & Internet grew 1.9% yoy in 3QFY17. Cyber security specialist TrustWave contributed revenue of S$113m, representing growth of 9.8% yoy, but incurred negative EBITDA of S$11m. 
  • There was healthy growth of 4.3% yoy from other managed services and 4.7% yoy from business solutions. EBITDA margin narrowed by 2.2ppt yoy to 27.0% due to TrustWave’s higher cost structure (increased hiring and setup security operation centre in Tokyo).

Group Digital Life: Amobee continues to scale up. 

  • Amobee’s advertising revenue from mobile, video and social media grew 20.8% yoy. Amobee secured new customers BlackRock and Dell while HOOQ ventured into original content production. 
  • Negative EBITDA was reduced by 30.3% yoy to S$23m.

Regional mobile associates: Growth from emerging countries. 

  • Earnings contribution from Telkomsel increased 31% yoy. It added 10m mobile subscribers qoq and its customer base expanded 14% yoy. Voice revenue increased 11% yoy while data & digital services grew 28% yoy. 
  • Unfortunately, contribution from Bharti Airtel was affected by a sharp increase in financing costs due to acquisition of spectrum. 
  • Contribution from NetLink Trust increased 25.9% yoy to S$39m due to the rapid migration to fibre broadband for NGNBN.


STOCK IMPACT


Maintain guidance for FY17. 

  • Management has maintained its guidance of stable EBITDA, dividends of S$1.2b from its regional mobile associates, capex of S$2.4b and free cash flow of S$1.5b for 2017.

Special dividends from divestment of NetLink Trust. 

  • Management has just started preparation for IPO of Netlink Trust. According to The Straits Times, Singtel has appointed Morgan Stanley, UBS and DBS as advisors. Singtel is required to reduce its stake in NetLink Trust to below 25% by Apr 18. 
  • Management indicated that Singtel would return a portion of the IPO proceeds back to shareholders. Singtel would be able to return up to 17.5 S cents/share back to shareholders assuming that NetLink Trust was valued at S$3.8b.

First mover in 5G. 

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

Overcoming competition in Australia. 

  • Singtel plans to secure high-value mobile subscribers in Australia through comprehensive 4G coverage, unrivalled mobile Internet experience and bundling of premium content, such as English Premier League (EPL) and NextFlix. 
  • For the fixed-line business, Optus has transformed itself from being an infrastructure provider to a reseller/distributor of connectivity from NBN Co. It differentiates itself by bundling mobile and pay-TV services to broadband connectivity, especially in areas where it has superior 4G coverage.


EARNINGS REVISION/RISK

  • We maintain our existing earnings forecast.


VALUATION/RECOMMENDATION

  • Maintain BUY. Our target price for Singtel is S$4.53 based on DCF (required rate of return: 5.75%, growth: 1.2%).


SHARE PRICE CATALYST

  • Singtel is the least affected by a fourth mobile operator in Singapore as overseas businesses accounts for about 70% of its bottom-line.
  • Singtel will benefit from growth at its regional mobile associates, such as 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/ 2017-02-10
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.530 Same 4.530



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