SingTel - CIMB Research 2015-12-09: Diversification pays

SingTel - CIMB Research 2015-11-12: Held back by weaker regional currencies SINGTEL Z74.SI 

SingTel - Diversification pays 

  • SingTel is the least at risk among its local peers of being negatively impacted by the entry of a fourth mobile operator in Singapore due to its diversified operations. 
  • We are longer-term positive on Trustwave due to growing demand for cyber security services. But Trustwave will be EPS-dilutive in FY16-18. 
  • Optus should gain further market traction as its network coverage/quality gap narrows vs Telstra. Service revenue is expected to grow, but at a measured pace. 
  • We forecast overall core net profit to grow by a decent 6.0%/5.6% in FY17/18. 
  • Maintain Add with an unchanged SOP-based target price of S$4.50. 

■ Least at risk from entry of a fourth mobile operator in Singapore 

  • SingTel will be the least impacted among its local peers by the entry of a fourth mobile operator in Singapore, as its mobile business only makes up c.11% of its FY03/16 Group EBITDA. 
  • Our sensitivity analysis suggests that our target price for SingTel would fall to S$4.30 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$4.60. 

■ 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. 

■ Decent mid-single digit core net profit growth in FY17-18 

  • 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$, before hitting 6.0% in FY17 and 5.6% in FY18, driven by higher associate and Optus earnings. 
  • Our FY16-18F forex rates for the A$ 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%. 

■ Maintain Add with unchanged SOP-based target price of S$4.50 

  • SingTel trades at FY17F EV/OpFCF of 16.1x and offers decent FY16F-18F dividend yields of 4.6-5.2%. The shares have slumped 14.0% from its peak in mid-Apr on the back of general market weakness and now offer 23% total returns (including 4.6% dividend yield). 
  • Maintain Add with an unchanged SOP-based target price of S$4.50. 
  • Potential catalysts include a rebound in regional currencies and earnings improvements at Optus.

FOONG Choong Chen CFA CIMB Securities | http://research.itradecimb.com/ 2015-12-09
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 4.50 Same 4.50