Singapore Telecommunications (ST SP) - UOB Kay Hian 2018-02-09: 3QFY18 Regional Mobile Associates Disappoint

Singapore Telecommunications (ST SP) - UOB Kay Hian 2018-02-09: 3QFY18 Regional Mobile Associates Disappoint SINGTEL Z74.SI

Singapore Telecommunications (ST SP) - 3QFY18 Regional Mobile Associates Disappoint

  • SingTel's 3QFY18 results were below expectations due to lower contributions from regional mobile associates Telkomsel and Bharti Airtel. Nevertheless, Optus achieved record net addition of 125,000 for post-paid mobile and grew EBITDA by 14.5% y-o-y in constant currency terms. 
  • Singtel’s defensive strength lies in its geographical diversity. We also expect a recovery in contributions from Telkomsel
  • Maintain BUY. Target price: S$4.40.



RESULTS

  • Singtel reported underlying net profit of S$898m for 3QFY18, below our forecast of S$975m.

Group Consumer: Optus the star. 

  • In Singapore, mobile revenue declined 3.3% y-o-y due to voice-to-data substitution and lower contribution from roaming. Singtel added only 7,000 post-paid mobile subscribers. Post-paid ARPU dropped 6.9% y-o-y to S$64 due to the shift towards SIM-only plans. Singapore Consumer’s EBITDA declined 8.9% y-o-y.
  • Optus’ mobile revenue increased 3.7% y-o-y in constant currency terms. It added a record 125,000 post-paid mobile subscribers. Post-paid ARPU was stable at A$46 despite the popularity of SIM-only plans. Fixed revenue increased 21% y-o-y with strong growth in NBN customers. Optus has secured spectrum for 2300MHz and 3500MHz in metropolitan areas, which enables it to offer high capacity 5G services. Optus’ EBITDA expanded 14.5% y-o-y.

Group Enterprise: ICT commands lower margins. 

  • ICT revenue declined 4.4% y-o-y due to timing of projects and one-off product sales last year. Data and Internet revenue fell 4.2% y-o-y due to price erosion in the traditional carriage business. EBITDA margin expanded 1.1ppt y-o-y to 28.1% on improved margins from ICT projects and tight cost control. 
  • Staff costs decreased 3.5% y-o-y due to lower bonus accruals.

Group Digital Life: Scaling up in digital marketing. 

  • Revenue from digital marketing doubled y-o-y due to the acquisition of Turn, which offers data analytics solutions for marketers. Amobee registered strong growth in media and social revenues, and was EBITDA positive for the second consecutive quarter. 
  • Group Digital Life reduced overall negative EBITDA by 39.7% y-o-y to S$14m.

Regional Mobile Associates: Hits from Telkomsel and Bharti Airtel. 

  • Regional mobile associates fared badly with total contribution down 17.9% y-o-y. 
  • Contribution from Telkomsel declined 8.6% y-o-y to S$329m due to competition in data and higher operation & maintenance expenses. Its contribution was also affected by a 6.4% y-o-y depreciation of the rupiah against the Singapore dollar. 
  • Contribution from Bharti Airtel dived 73.4% y-o-y to just S$38m due to mandatory reduction of interconnect usage charge from Rs0.14 to Rs0.06 and intense price competition from Reliance Jio.
  • AIS achieved growth in service revenue of 3% y-o-y due to data revenue from post-paid mobile and expansion into fixed broadband. Contribution from AIS increased 34.4% y-o-y due to strong cost management. 
  • Globe achieved growth in service revenue of 5% y-o-y, driven by data and Internet connectivity. Contribution from Globe dropped 34.8% y-o-y on higher depreciation and interest expenses due to heavy network investments.



STOCK IMPACT


Maintain guidance for FY18. 

  • For FY18, management maintains guidance of mid-single digit growth in revenue, low-single-digit growth in EBITDA, cash capex of S$2.4b, spectrum payments of S$1b in Singapore and Australia, dividends of S$1.4b from mobile associates and free cash flow of S$1.8b.



EARNINGS REVISION/RISK

  • We cut our net profit forecasts by 5.2% for FY18 and 7.6% for FY19 due to lower contributions from mobile associates and the depreciation of regional currencies against the Singapore dollar.



VALUATION/RECOMMENDATION

  • Maintain BUY. 
  • Our target price is S$4.40, based on DCF (required rate of return: 6.25%, 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/ 2018-02-09
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.40 Down 4.530



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