Singapore Telecommunications (ST SP) - UOB Kay Hian 2017-11-10: 2QFY18 Special Dividend Too Overly Conservative

Singapore Telecommunications (ST SP) - UOB Kay Hian 2017-11-10: 2QFY18 Special Dividend Too Overly Conservative SINGTEL Z74.SI

Singapore Telecommunications (ST SP) - 2QFY18 Special Dividend Too Overly Conservative

  • Singtel’s underlying net profit of S$929m was in line with our expectations. It achieved single-digit growth in EBITDA for consumer businesses in Singapore and Australia and benefitted from strength of the A$. 
  • Contributions from regional mobile associates were affected by intense competition in India. 
  • Singtel declared an interim dividend of 6.8 S cents and special dividend of 3.0 S cents (consensus: 8-13 S cents). The amount of special dividend is overly conservative but net debt/EBITDA has improved from 1.3x to 1.1x. 
  • Maintain BUY. Target price: S$4.53.



RESULTS

  • Singtel reported underlying net profit of S$929m for 2QFY18, in line with our forecast of S$923m. The results included exceptional gain of S$1,960m (our estimate: S$1,895m) from the divestment of its 75.2% stake during the IPO of NetLink NBN Trust.

Group Consumer: Sees margin expansion in Singapore and Australia. 

  • In Singapore, ARPU for post-paid mobile eased 1.5% qoq and 7.3% yoy to S$64 due to lower voice and roaming revenue and increased demand for SIM-only plans. 
  • Singtel gained only 9,000 post-paid subscribers as customers were waiting for iPhone X, which resulted in lower recontracting volume, but also reduced handsets subsidies. EBITDA from Singapore increased 6.4% yoy while EBITDA margin improved 3ppt yoy to 38.1%.

Optus maintained growth momentum by gaining 75,000 post-paid handset subscribers.

  • Post-paid ARPU was stable qoq but dropped slightly by 2.1% yoy to A$46 due to device repayment credits. Optus also added 73,000 NBN customers. Contributions from Optus was boosted as the average exchange rate for A$ increased 4.8% yoy and 2.8% qoq.
  • EBITDA from Australia increased 4.5% yoy while EBITDA margin improved 1.9ppt yoy to 34.9%.

Group Enterprise: ICT commands lower margins. 

  • ICT revenue grew 13.8% yoy due to managed services, cyber security and contract wins in Singapore and Australia. EBITDA margin narrowed 3.2ppt yoy to 28% due to the shift in revenue mix towards ICT. ICT business contributed 48% of enterprise revenue versus 44% last year.

Group Digital Life: Scaling up. 

  • Revenue from digital marketing increased 92.5% yoy due to the acquisition of Turn, which offers data and analytics solutions for marketers. Amobee has turned EBITDA positive. It expanded its relationship with agencies, such as Dentsu Aegis, and added HSBC and Ascendas as new customers. 
  • Group Digital Life has reduced overall negative EBITDA by 41.3% yoy to S$14m.

Regional Mobile Associates: Moderation in growth from Telkomsel. 

  • Earnings contribution from regional mobile associates dropped 7.2% yoy. 
  • Revenue from Telkomsel increased by a slower 4% yoy due to a high base created by Ramadhan festivities during Jul 17 and a 6% yoy decline for voice revenue. Contributions from Telkomsel grew marginally by 1.7% yoy dampened as the rupiah depreciated 1.9% qoq. 
  • Bharti Airtel suffered severe price erosion due to competition from new entrant Reliance Jio, and saw ARPU decline 23% yoy to Rs145. It managed to add 1.4m mobile subscribers in India. EBITDA from Africa increased 41% yoy due to cost control initiatives. Overall, contributions from Bharti Airtel declined 51.8% yoy.

AIS registered double-digit growth of 15% for EBITDA and 20% for net profit. 

  • Revenue grew 6% due to growth from fibre broadband services and data revenue from post-paid mobile.
  • Globe’s revenue grew 9% yoy driven by mobile data. Contributions from Globe were unchanged due to higher depreciation and interest expense and depreciation of the peso.


Too conservative on special dividend. 

  • Singtel has declared interim dividend of 6.8 S cents, representing payout of 60%. The board also approved special dividend of 3.0 S cents, paying out S$500m out of total proceeds of S$2,300m from divestment of NetLink NBN Trust. Management intends to utilise the balance of proceeds for acquisition of spectrum and investments in digital initiatives.


STOCK IMPACT


Maintain guidance for FY18. 

  • Management has maintained its guidance of mid-single digit growth in revenue, low single-digit growth in EBITDA, cash capex of S$2.4b, spectrum payments in Singapore and Australia of S$1b, dividends of S$1.4b from its regional mobile associates and free cash flow of S$1.8b for FY18.

Rolling out massive MIMO in Australia. 

  • In September, Optus became the first telco in the world to deploy 3-channel massive MIMO in Sydney, achieving data throughput of 800Mbps. It will roll out the latest antenna technology to other capital cities over the next six months. The enhancement of coverage and capacity would ensure that Optus is able to maintain its market share if competition intensifies.


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: 6.1%, growth: 1.5%).


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 benefits from growth at its regional mobile associates, namely 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/ 2017-11-10
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.530 Same 4.530



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