UOB Kay Hian 2015-08-27: SingTel - Growth Momentum From Australia Maintained; Mild Impact From FX.

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SINGTEL Z74.SI

Growth Momentum From Australia Maintained; Mild Impact From FX 

• Competition has intensified with mobile operators increasing their data allowance in Australia. Nevertheless, Optus continues to win post-paid subscribers by differentiating through its My Plan Plus that offers data sharing. 
• The impact from the depreciation of Chinese Yuan is mild given that all regional currencies, including the Singapore Dollar, have weakened in tandem. 
• Maintain BUY but with target price marginally lowered from S$4.75 to S$4.72. 

WHAT’S NEW 

• Differentiating with data sharing targeted at families. 

• Optus’ new My Plan Plus allows families to pool separate mobile plans under one bill to share the combined data allowance, and this plan was launched in Apr 15. Typically, 68% of customers use less than 50% of their monthly allowance. Demand for data is asymmetric. Those aged 18-20 use 2.7 times more data compared with those above 45 years old. Thus, many parents would find My Plan Plus attractive as they can share their unused data with their children. 
• The new package also provides unlimited national calls and unlimited local and international SMS. Each family can also connect up to five mobile broadband devices, such as tablets and laptops, at a one-time fee of A$5 per device. 

• Increased competitive intensity. 

• Optus has increased the data allowance for its standard A$60 plan from 2GB to 3GB and for its A$100 plan from 3GB to 10GB. Similarly, Telstra has increased the data allowance for its A$70 plan from 1.5GB to 3.5GB and its A$95 plan from 2.5GB to 6GB. Both mobile operators are investing heavily to support the growth in data traffic. Optus has increased its capex for mobile from S$1.4b to S$1.9b. Telstra has similarly increased its capex by 25% to A$5b over three years. 

• The appointment of Allen Lew as CEO in Sep 14 has revived growth at Optus. 

• Optus has achieved robust net addition averaging 50,000 post-paid subscribers per quarter since 2QFY15, surpassing rival Telstra. It has gained market share in post-paid mobile over the past two quarters. Mobile service revenue grew 5.6% yoy to A$1.1b in 1QFY16. 

• Catching up with Telstra in regional Australia. 

• Optus has accelerated its roll-out of 4G in metropolitan and regional areas following the release of 700MHz frequency spectrum in Jan 15. Its current population coverage for 4G is 90%, closing the gap with Telstra at 94%. It will utilise its new 700MHz spectrum to extend coverage to fringe cities in rural areas and aims to achieve a market share of 30% for rural areas. 

• Strengthening suite of products with entertainment. 

• Optus offered free six-month subscription to NetFlix for new and re-contracting customers signing up for home broadband, post-paid mobile and mobile broadband. Revenue from pay-TV has increased 18.9% yoy in 1QFY16 and pay-TV subscriber base has doubled since January. 
• Optus maintains sticky customer relationships and differentiates itself by bundling mobile, fixed broadband and entertainment offerings. Besides Optus TV with Fetch, Optus could also expand into other forms of entertainment, such as music. 

STOCK IMPACT 

• Contribution from Optus hampered by weak Australian dollar. 

• The Australia Consumer business registered growth of 12.8% yoy for operating revenue and 8% yoy for EBITDA in 1QFY16. Unfortunately, contribution from Optus was affected by the 10.6% yoy depreciation of the Australian dollar against the Singapore dollar. 

• Damage from fluctuation in forex rates is mild. 

• Perception wise, many investors believed the depreciation of Chinese renminbi that wreaked havoc in the forex market has dented Singtel’s outlook. In reality, this widely-accepted view is far from the truth. The weakness in regional currencies occurred in April when the Indian rupee and Thai baht depreciated 5.2% and 4.9% against the Singapore dollar respectively. 
• Thereafter, the fluctuation in regional currencies against the Singapore dollar has been less volatile. The impact from the depreciation of Chinese Yuan is mild given that all regional currencies, including the Singapore Dollar, have weakened in tandem. 

EARNINGS REVISION/RISK 

• We maintain our existing earnings forecast in local currency terms. 

• We have reviewed and factored in further depreciation of regional currencies against the Singapore dollar. We have trimmed our earnings forecast in Singapore dollar terms by 1.6% for FY16 and 2.6% for FY17. 
• Earnings growth in FY16F is restrained by fluctuation in foreign exchange rates in past quarters. We estimated that earnings growth for FY16F would have been about 7% based on constant currency terms, compared to our current forecast of 0.5%. 

VALUATION/RECOMMENDATION 

• Our target price is S$4.72 based on DCF (required rate of return: 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 2015-08-27

BUY Maintain BUY 4.72 Down 4.75