UOB Kay Hian 2015-08-14: Singtel - 1Q16; Hampered By Weak Australian Dollar; Less Contribution From Bharti. Maintain BUY.

SINGTEL Z74.SI

1QFY16: Hampered By Weak Australian Dollar; Less Contribution From Bharti 


  • 1QFY16 results were slightly below expectations due to a weak Australian dollar and lower contribution from Bharti. 
  • SingTel has maintained its growth momentum in Australia and regional mobile associates are expected to resume their growth trajectory. 
  • Maintain BUY with a lower target price of S$4.75. 




RESULTS


Singapore Telecommunications (SingTel) reported net profit of S$942m, slightly below our expectation of S$977m. The variance was due to a lower contribution from Bharti.

• Group Consumer: Hampered by depreciation of A$.

  • In Singapore, revenue from mobile services increased 3.6% yoy. SingTel added 13,000 post-paid subscribers but post-paid ARPU declined 2.3% yoy to S$74. Revenue from fixed broadband grew 6% yoy as customers upgraded to higher-speed plans of 200Mbps and above. 

• Optus continues to maintain its growth momentum.

  • Revenue from mobile services grew 5.6% yoy. It added 38,000 post-paid subscribers. Pre-paid ARPU increased 8.8% yoy to A$28. Revenue from pay TV increased 18.9% yoy with doubling of subscriber base since January after the introduction of bundling with NetFlix. Revenue expanded 12.8% yoy and EBITDA expanded 8% yoy in constant currency terms. Unfortunately, contribution from Australia was dampened by the depreciation of the Australian dollar against the Singapore dollar of 10.6% yoy. 

• Group Enterprise: Pricing remains competitive.

  • Revenue from data & internet, including provisions of local and international leased lines, increased 4% yoy. SingTel gained market share in international virtual private network and defended its leadership position for the corporate data market in Singapore. Unfortunately, pricing remains competitive and EBITDA from Singapore’s enterprise business declined 2.8% yoy. 

• Group Digital Life: Investing for the long haul.

  • Revenue from digital advertising tripled on a yoy basis due to the acquisition of Kontera and Adconion. Negative EBITDA was reduced by 16% yoy to S$31m due to business rationalisation. Amobee secured key customer wins, such as Kellogg’s, Ford and Westpac, during the quarter. 

• Regional Mobile Associates: Healthy growth despite setback from India.

  • Earnings contribution from its mobile associates grew 5.2% yoy to S$625m. 

• Telkomsel: Growth from adoption of data-enabled devices.

  • Telkomsel added 2.6m mobile subscribers and its mobile subscriber base expanded 4.9% yoy. We estimate blended ARPU increased 10.2% yoy to Rp40,800, driven by increased usage during the festive Lebaran season. Data traffic soared 131.1% yoy. We estimate average usage per data user grew 124.5% yoy to 0.6GB, driven by the adoption of 3G/4G devices, which expanded 54.2% yoy. The penetration for 3G/4G devices improved 2.5ppt to 33.4%. Data revenue grew 37.7% yoy. Earnings contribution from Telkomsel increased 9.2% yoy to S$248m. 

• Bharti Airtel: Affected by higher net finance costs and depreciation of African currencies.

  • Bharti’s customer base expanded 10.2% yoy to 230.7m with the addition of 4.6m subscribers. ARPU was stable at Rs198. Data traffic grew 83% yoy. Pre-tax operating profit from Africa declined 43% yoy to S$15m due to the significant depreciation of African currencies. Earnings contribution from Bharti decreased 12.1% yoy to S$168m due to higher net finance costs (lower investment gains). 

• Contribution from AIS increased 20.8% yoy to S$116m. 

  • Service revenue increased 3% yoy driven by mobile data. EBITDA grew 14% yoy due to savings on regulatory costs from migration to 3G. The Thai baht strengthened 4.2% yoy against the Singapore dollar. Contribution from Globe Telecom increased 12% yoy to S$92m. Globe added 2.2m subscribers and customer base expanded 13% yoy. It also benefitted from the appreciation of the Philippine peso against the Singapore dollar of 5.7% yoy. 


STOCK IMPACT


• Maintain guidance for FY16. 

  • Revenue is expected to grow at mid single-digit while EBITDA is expected to increase at low single-digit. Group Digital Life is expected to record negative EBITDA of S$150m-180m. We expect growth to be driven by its regional mobile associates. 

• Continued expansion in Australia.

  • Population coverage for 4G has improved to almost 90%. 4G is available in all capital cities and over 300 regional towns. Optus will continue to invest to increase the depth and reach of its 4G network using the 700MHz frequency spectrum. Its Post-paid Family Sharing plan allows family members to pool their mobile data allowances. Its Pre-paid Data Rollover plan allows customers to roll over up to 10GB of un-used data. On the home front, Optus is driving the take-up of broadband services by bundling with entertainment offers, such as NetFlix.


EARNINGS REVISION/RISK

  • We have reduced our net profit forecast for FY16 by 4.7% and for FY17 by 5.1% due to the recent depreciation of the Australian dollar against the Singapore dollar and lower contribution from Bharti. 


VALUATION/RECOMMENDATION

  • Our target price for SingTel is S$4.75 based on DCF (COE: 5.45%, terminal growth: 1.0%). 


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 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. 
  • SingTel is the largest and most liquid defensive stock listed on the Singapore Exchange and deserves to trade at a premium.


Jonathan Koh CFA | http://research.uobkayhian.com/ UOB KH 2015-08-14
BUY Maintain BUY 4.75 Down 4.80


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