Singtel (Singapore Telecommunications) - Maybank Kim Eng 2016-05-12: Decent outlook, IPO catalyst

SINGTEL Singapore Telecommunications Z74.SI

Singapore Telecommunications (ST SP) - Decent outlook, IPO catalyst

FY16 was in line, despite a soft end to the year for revenue.
However, the FY17 outlook is decent given guidance for low single digit revenue and EBITDA growth by Singtel.
In addition, Singtel has reportedly set in motion an IPO process for NetLink Trust, its fibre-optic network infrastructure unit, which could bring in more than SGD3b to beef up its capacity for acquisitions and market share grabs.

FY16 was in line despite a soft topline in 4Q, affected by reduced mobile termination rates in Australia, consolidation of loss-making Trustwave and weak AUD.
Mobile revenue in Singapore and Australia was also hit by lower handset sales and IDD.
We are not overly concerned about the lower 4Q revenue, as they do not affect margins and EBITDA. In fact, profitability benefited as costs fell faster.
Associates (mainly Telkomsel) carried the day, as they grew 5% in 4Q16 and 8% in FY16.

Singtel expects revenue and EBITDA to rise by low single digit in FY17.
While revenue growth is expected to trail FY16 slightly, we think the quality of earnings will be better as the high-margin Enterprise business is expected to lead the way, driven by expected low-teens growth of ICT (Managed Services & Business Solutions). It takes over from Consumer, which is increasingly held back by high penetration and growing competition, especially in Singapore.

Singtel has to divest at least 75% of NetLink Trust by Apr 2018, going by its agreement with the government.
Currently 100% owned, NLT operates the physical infrastructure of the nationwide fibre-optic network. We understand that management has set in motion a possible IPO.
Assuming a reported valuation of SGD4.5b, it could bring in more than SGD3b, which would give Singtel more firepower to acquire, especially in the Enterprise and Digital Life space.

No new competitor to take up a new mobile operator licence. The three incumbents keep their spectrum allocations, including bands reserved for fourth telco.
AUD reverses its weakening trend against SGD. Every 1% gain in AUD translates to 0.5% gain in Optus revenue, as Optus accounts for c.55% of group revenue.

May not be able to maintain 70% dividend payouts if it needs to reserve cash to pay for spectrum or network investments, especially if associate dividends flag.

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-12

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 4.50 Up 4.40