Singapore Telecommunications - UOB Kay Hian 2015-11-13: 2QFY16 ~ Surviving The Onslaught From Exchange Rate Volatility

Singapore Telecommunications  - UOB Kay Hian 2015-11-13: 2QFY16 ~ Surviving The Onslaught From Exchange Rate Volatility SINGTEL Singapore Telecommunications Z74.SI 

Singapore Telecommunications (ST SP) - 2QFY16: Surviving The Onslaught From Exchange Rate Volatility 

  • Singtel’s earnings met expectations despite headwinds from the depreciation of the Australian dollar and Indonesian rupiah. 
  • Telkomsel generated impressive growth, benefitting from a benign competitive environment, higher pricing for SMS and growth in data. 
  • Maintain BUY. Target price: S$4.56. 


RESULTS 

  • Singtel reported underlying net profit of S$974m in 2QFY16, in line with our forecast of S$964m. 

 Group consumer: drag from weakness in A$. 

  • Consumer business in Singapore did well with revenue from mobile and fixed broadband increasing 2.3% yoy and 4.7% yoy respectively. EBITDA from Singapore increased 9.5% yoy as Singtel trimmed operating expenses by 2.6% yoy. Revenue from mobile in Australia increased 3.3% yoy in local currency terms. Optus added 57,000 post-paid subscribers, confounding harsh criticism that Optus is losing competitiveness in Australia. Revenue and EBITDA from the consumer business in Australia grew 8.9% and 8.7% yoy respectively in local currency terms. 

 Group Enterprise: gaining better traction. 

  • Revenue from Singapore increased 3% yoy. Managed services grew 7.8% yoy due to on-boarding of government agencies to the GCloud platform. Singtel invested S$400m in a new data centre in Singapore during the quarter. Data & internet grew 5% yoy due to demand for international and domestic leased circuits. EBITDA from enterprise businesses in Singapore would have increased 4.3% yoy if we exclude fibre rollout & maintenance. 
  • The acquisition of TrustWave was completed on 1 Sep 15 and will be consolidated in 3QFY16. 
  • Group digital life: rationalise to sharpen focus. 
  • Amobee’s advertising revenue increased 40.7% yoy to S$124m and incurred negative EBITDA of S$13m. Other major businesses - HOOQ and DataSpark - were still in the ramp-up stage and did not contribute much to revenue. EBITDA declined 15% yoy to S$34m as Singtel rationalised its digital life businesses. 

 Regional mobile associates: Telkomsel overshadows. 

  • Earnings contributions from regional mobile associates increased 4.5% yoy to S$684m. 
  • Contribution from Telkomsel increased 28% yoy in rupiah terms but grew at a slower pace of 21% yoy when translated to Singapore dollar. Telkomsel’s subscriber base expanded 6.6% yoy to 148.6m. We estimated the effective pricing for SMS increased 16.8% yoy, coming mainly from outside of Java. 
  • Data revenue rose about 40% yoy. Earnings contribution of S$299m from Telkomsel represents 21.2% of Singtel’s group PBT. 
  • Bharti’s subscriber base in India expanded 11.1% yoy to 235.2m. It has 51m data customers, accounting for 21.7% of total subscribers. Data usage per customer increased 35.9% yoy to 765MB while data ARPU increased 28.7% yoy. Earnings contribution from India, Sri Lanka and Bangladesh increased 12.9% yoy. 
  • Overall earnings contribution from Bharti declined 24.6% yoy to S$153m due to higher finance costs and fair value losses. 
  • Earnings contributions from AIS and Globe Telecom were relatively unchanged at S$102m and S$78m respectively. 

 Weathering the currency storm. 

  • The quarter witnessed significant headwinds from volatility in foreign exchange rates. In particular, the Australian dollar and Indonesian rupiah depreciated 12.8% yoy and 6% yoy against the Singapore dollar. On a constant currency basis, Singtel’s operating revenue, EBITDA and net profit in 2QFY16 would have increased 5%, 5% and 4% yoy respectively. 


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. We expect growth at Singtel to be driven by its regional mobile associates. 

 Flexibility with SIM-only plans. 

  • Singtel has launched fully customisable SIM-only plans in Sep 15. The basic plan is a S$20 starter pack which provides 5GB of data (3GB mobile data and 2GB WiFi) and free incoming calls and SMS. Customers pay S$5 for every additional 1GB of mobile data. Similarly, customers could add more voice minutes and SMS to their starter pack depending on their needs. 

 MDA reviewing whether BPL is exclusive content. 

  • Singtel has secured the broadcast rights to all Barclays Premier League (BPL) matches for the next three seasons commencing Aug 16. It has signed an option to acquire the broadcast rights. The Media Development Authority (MDA) is reviewing the construct of the agreement to determine if the broadcast rights are acquired on an exclusive basis and, thus, subject to cross carriage rule. 

 Singtel maintained an interim dividend at 6.8 cents/share, representing a payout ratio of 58%. 



EARNINGS REVISION/RISK 

  • We maintain our existing earnings forecast. 


VALUATION/RECOMMENDATION 

  • Maintain BUY. 
  • We have done a scenario analysis based on two possible outcomes: scenario A - no new entrant, and scenario B – a fourth mobile operator disrupts the status quo. We attribute a probability of 75% for scenario A and 25% for scenario B. Our probability-weighted target price is S$4.56. 
  • If there is no fourth operator (scenario A), our target price is S$4.65. If a fourth operator enters the mobile market (scenario B), our target price is S$4.30. 


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 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/ 2015-11-13
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.56 Same 4.56


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