Singtel - RHB Invest 2018-02-08: YES Optus!

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SINGTEL Z74.SI

Singtel - YES Optus!

• Singtel’s 9MFY18 results were in line, with the stronger showing at Optus offset by weaker associate contributions and the tight competition in Singapore. 
• We maintain our core earnings forecasts but upgrade our call to BUY (from Neutral), based on unchanged SOP-derived Target Price of SGD4.10 (20% upside). This follows the sharp de-rating in SingTel's share price on broader market weakness and concerns over inflationary expectations in the US. The stock has also underperformed relative to domestic peers and the FSTTI YTD. 
• Singtel currently trades at 10x FY18F EV/EBITDA, below its five year historical mean of 12x, with share price supported by its diversified regional exposure and attractive FY18F dividend yield of 6%. 
• SingTel remains our preferred pick for Singapore telco exposure.

Broadly in line. 

• SingTels' 9MFY18 core earnings of SGD2.7bn (excluding earlier gains from the sale of NetLink Trust (NETLINK SP, NR) were down 5.2% y-o-y, which formed 74% of our forecast and 73% of consensus. This was led by weaker associates (-11%) and higher net financing cost (+46%). 
• Revenue was 4.4% higher y-o-y in 3QFY18, on stronger contribution from the digital business (with the acquisition of Turn Inc in Apr 2017) and stellar growth at Optus, albeit partially mitigated by the weaker AUD/SGD.

Singapore hit by higher handset subsidies and lower enterprise revenue. 

• Consumer mobile revenue was down 3.3% y-o-y (q-o-q: flat) – or -2% excluding SGD6bn in inter-operator discounts – on continued lower usage/roaming revenue and dilution from SIM-only plans, partly offset by higher data. 
• EBITDA fell a sharper 9% y-o-y (-22% q-o-q) on lower revenue and seasonally higher handset subsidies (iPhone 8/X sales). Consequently, EBITDA margin narrowed 11.1ppts q-o-q to 27.1%. 
• Enterprise revenue fell 3% (-1.4% q-o-q) from the phasing of projects and lumpy sales in the preceding quarter, although EBITDA was steady on tight cost management.

Optus posted strong EBITDA on record postpaid subscribers. 

• Consumer EBITDA surged 15% y-o-y/q-o-q on record postpaid subscriber addition and higher national broadband network (NBN) migration payments. 
• Mobile service revenue was up 4% (+1% q-o-q), the strongest since 3QFY16, with the addition of 127,000 postpaid subscribers. 
• Optus’ 4G mobile coverage reached 96.6% with 6,583 4G sites, 84% of this on the superior 700MHz band.

Digital life services tracking ahead on reduced losses. 

• Higher content investments for HOOQ partially offset the strong growth at the digital mobile advertising arm, Amobee (+112% y-o-y/+17% q-o-q). 
• 9MFY18 EBITDA loss of SGD52m (3QFY18 loss of SGD14m) looks to be trending below the guidance of SGD100m loss for FY18.

Associate contributions impacted by tight competition in Indonesia and India. 

• Regional mobile associates in SGD terms fell for the second consecutive quarter, by 16% (-18% y-o-y) with the key drags from Telkomsel (-11%) and Airtel (-53%), partly mitigated by Advanced Info Service (AIS) (+6%). The prepaid registration exercise in Indonesia (deadline of 28 Feb) has triggered a fresh round of aggression in 4Q17 as telcos take the opportunity to grab share. 
• Over in India, competition remains intense, with the pressure on revenue/earnings further exacerbated by the cut in domestic interconnect usage charge (IUC), which took effect in Oct 2017.

Upgrade to BUY following the sharp correction in share price. 

• We maintain our core earnings forecasts but upgrade our call to BUY (from Neutral), based on unchanged SOP-derived Target Price of SGD4.10. This follows the sharp de-rating in SingTel's share price (hitting a 52-week low) over the past two weeks on broader market weakness and concerns over inflationary expectations in the US (which are fuelling a further unwinding of the yield compression theme). 
• The stock has also underperformed relative to its domestic peers and the FTSE Telecommunications Index (FSTTI) YTD. 
• Singtel currently trades at 10x FY18F EV/EBITDA, below its five year historical mean of 12x, with share price supported by its diversified regional exposure and attractive FY18F dividend yield of 6%. 
• The key downside risk would be stronger-than-expected competition in the domestic market, Indonesia, Australia and India. It remains our preferred domestic telco exposure.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2018-02-08

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