SingTel (ST SP) - UOB Kay Hian 2017-09-14: Growing Nicely In Emerging Indonesia And India

SINGTEL Z74.SI

Singapore Telecommunications (ST SP) - Growing Nicely In Emerging Indonesia And India

Singtel will benefit from growth in Indonesia and India. Telkomsel enjoys double-digit organic growth in subscriber base and a continued surge in usage of data.
Bharti Airtel should experience a recovery in FY19 due to the massive industry consolidation. Inclusive of special dividend from divestment of NetLink Trust, Singtel provides an attractive dividend yield of 7.2% for FY18 and 5.2% for FY19.

Telkomsel continued to achieve triple double-digit growth of 11.9% for revenue, 14% for EBITDA and 15.6% for net profit in 2Q17. Subscriber base expanded 13.1% yoy to 178m (Indosat: 19.8% yoy, XL: 14.8% yoy), with the company winning customers through its superior network quality. Blended ARPU was stable at Rp45,000, compared to steep falls for Indosat (-13.3% yoy) and XL (-8.1% yoy).
Telkomsel continues to maintain its share of high-value subscribers and its lead outside of Java. It optimises its revenue through cluster-based pricing and market segmentation.
Voice revenue grew 8.7% yoy in 2Q17, boosted by migration from pay-as-you-use (PAYU) to voice packages. Customers on flash data packages have increased 63.9% yoy to 81.7m in 2Q17, accounting for 45.9% of its subscriber base. Data traffic grew by a hefty 121.3% yoy in 2Q17.

Reliance Jio had commenced charging customers at a discounted rate since 1 Apr 17 after providing voice and data services for free over six months. Customers who signed up for the Jio Prime programme will get free voice calls and unlimited data (1GB per day) at only Rs303/month after paying a one-off membership fee of Rs99.
Reliance Jio had won 100m subscribers within 170 days after its launch in Sep 16. 72m subscribers have signed up for Jio Prime out of total of 108 subscribers as of Mar 17, representing a conversion rate of 67%. It currently has 125m subscribers and is expected to be ranked the fourth largest operator after the wave of M&As. It plans to expanded coverage to 99% of population by end-17.
Vodafone India and Idea Cellular have merged, creating a behemoth with 400m subscribers (combined market share: 36%). Bharti Airtel has agreed to acquire Telenor India (combined market share: 29%), thus gaining valuable spectrum for the 1800MHz frequency band in six Indian states. Reliance Communications is also negotiating a merger with Aircel. Many small operators would eventually be taken over, consolidating the industry from 11 to just six players. Industry consolidation has triggered a 32% rally in Bharti’s share price on an ytd basis.

Optus gained share in the post-paid market by adding 283,000 and 54,000 post-paid subscribers during FY17 and 1QFY18 respectively due to the enhanced quality of its network, expansion into regional Australia and exclusive content for EPL. It offers bundled packages with mobile and fibre broadband via NBN, focusing on areas where it has strong 4G mobile coverage.
Competition is expected to intensify as TPG Telecom launches mobile services to become the fourth mobile operator in Australia. Incumbent operators are building up their defences. Telstra plans to launch its no frills mobile services, Belong Mobile, in the upcoming months to target the youth market. It has also committed to invest additional capex of A$3b over the next three years, raising capex/sales ratio to 18%.
Singtel Optus hosts Amaysim as a mobile virtual network operator (MVNO) with 1.2m subscribers, addressing the same no frills budget segment that TPG is likely to target. It continues to beef up its network in regional Australia, targeting a population coverage of 98% by endFY18.

Singtel has received S$1,095.3m in cash for the divestment of its 75.01% stake in NetLink Trust. The shareholder loan of S$1,100m has also been repaid. Singtel's book cost for 100% of NetLink is only S$265m. Singtel would recognise a divestment gain of S$1,895m - including the release of unamortised deferred gain - in 2QFY18.
Management intends to utilise the total proceeds of S$2,195.3m for investing in its core businesses, new business opportunities, to pay down debt and for capital management initiatives. The special dividend related to NetLink NBN Trust’s IPO could be up to a maximum of 13.8 S cents. The board would deliberate on the potential special dividend together with the interim dividend when Singtel releases its 2QFY18 results in midNovember.

Telkomsel continues to maintain double-digit growth in subscriber base and revenue growth from voice and data. Bharti should start to recover in FY19 due to the massive industry consolidation. However, the mobile market in Australia could become more competitive with the entry of TPG Telecom and Telstra’s launch of Belong Mobile.

We have factored in a special dividend of 9 S cents/share from the divestment of NetLink Trust which represents 65% of total proceeds.

We expect earnings to decline 4.7% in FY18 due to the setback at Bharti Airtel.
We expect earnings to recover by 8.5% in FY19 due to growth from regional mobile associates.

Our target price for Singtel of S$4.53 is based on DCF (required rate of return: 6%, growth: 1.5%).

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.
It 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/ 2017-09-14

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