CIMB Research 2015-07-09: SingTel - Diversification Pays. Maintain HOLD with lower TP.

Diversification pays 

  • We expect FY16 earnings growth to be flattish given weaker regional currencies and dilution from the recent Trustwave acquisition, which will offset Optus’s stronger performance. 
  • On the positive side, SingTel will be the least impacted by the entry of a fourth MNO in Singapore. 
  • We maintain our core FY16F-17F EPS and cut FY18F EPS by only 0.6% to factor in the fourth mobile network operator’s (MNO) service launch in mid-2017. 
  • We have assumed the entry of another MNO will lower its Singapore mobile ARPU by 15% by FY21. 
  • We maintain our Hold rating with a 2.3% lower SOP-based target price $4.30. We believe its FY16 EV/OpFCF of 19.6x is fair, supported by decent 4.0-4.5% yields over FY16-18. 

Sensitivity analysis on target price 

  • Our sensitivity analysis suggests that our target price for SingTel would fall to S$4.10 if its Singapore mobile ARPU is negatively impacted by 30% (bear-case) by FY21. 
  • If the negative impact on mobile ARPU is only 5% (bull-case), our target price would be at S$4.38.

Weaker regional currencies 

  • The fourth MNO issue aside, we expect SingTel’s core net profit growth to be flattish (-0.4%) in FY16 (FY15: +3.6%), mainly due to weaker regional currencies vs. S$, before hitting 6.0% in FY17 and 5.6% in FY18. 
  • Our FY16-18F forex rates for the A$ and Rp are 6.5% and 5.1% lower, respectively, vs. the FY15 average. In constant currency, our FY16 core net profit growth forecast is 2.5%. 

Dilutive new investments 

  • We are longer-term positive on the S$1.07bn acquisition of Trustwave as we see growing demand for cyber security services. However, it will be EBITDA-dilutive in FY16 and EPS-dilutive in FY16-18. 
  • Also, SingTel has raised its FY16 accrued capex to S$3.0bn (FY15: S$2.4bn) to enhance Optus’s mobile network, build a new Singapore data centre and upgrade its billing/customer care system. The resulting higher funding costs and depreciation will weigh on earnings in the short term, in our view. 

Still optimistic on Optus 

  • Optus is starting to gain greater market traction with its My Plan packages and better coverage from its new 4G-700MHz network. With higher capex to upgrade the network, we believe Optus will further narrow the network coverage/quality gap with Telstra and gain market share. 
  • We expect Optus’s service revenue growth to be better but measured, at 1.8% p.a. in FY16-17 (FY15: +1.1%, FY14: -4.1%), as network improvements take time and rivals could react to defend their market share. 
(FOONG Choong Chen, CFA)

Source: http://research.itradecimb.com/