Singtel - UOB Kay Hian 2016-05-13: 4QFY16 Telkomsel Was Star Performer

Singtel - UOB Kay Hian 2016-05-13: 4QFY16 Telkomsel Was Star Performer SINGTEL Singapore Telecommunications Z74.SI 

Singapore Telecommunications - 4QFY16: Telkomsel Was Star Performer

  • Growth from Optus’ mobile and pay-TV businesses and benefits from cost rationalisation were held back by a 5% depreciation of the A$ against the S$. 
  • Contribution from Telkomsel grew 32% yoy driven by expansion in subscriber base of 8.6% yoy and data revenue growth of 49% yoy. 
  • We expect Optus and regional mobile associates to be key growth drivers. 
  • Maintain BUY. Target price: S$4.38.


RESULTS

  • Singtel reported net profit of S$981m for 4QFY16, ahead of our expectations of S$932m. 

• Group Consumer: Growth from Optus held back by depreciation of A$ 

  • Revenue from Singapore declined 8% due to lower handset sales (-39.5%) and contribution from iDD services (-15.3%). Revenue contribution from mobile was stable. Singtel added 6,000 post-paid subscribers but post-paid ARPU has further declined 4% yoy to S$70/month. 29% of customers on tiered data plans exceeded their data bundle. Staff costs were trimmed by 3.4%. EBITDA from Singapore dropped 2%.
  • Revenue from Australia declined 10% in local currency terms due to significant drop in mobile termination rates from 3.6 S cents/min to 1.7 S cents/min with effect from 1 Jan 16. Post-paid subscribers expanded 68,000 yoy, excluding deactivation of low-value wholesale customers from TPG. Blended ARPU would have increased 5% yoy excluding the impact from reduction in mobile termination rates. Revenue from fixed-line business grew 4.3% driven by pay-TV. Selling & administrative and staff costs were cut by 14.4% and 11.2% respectively. EBITDA grew 4% in local currency terms.
  • Contribution from Optus, which accounted for 51.3% of group revenue, was held back by depreciation of A$ against S$ of 5% yoy. EBITDA from Group Consumer would have increased 3% if we ignore the negative impact from depreciation of A$.

• Group Enterprise: Entrenched in securing government contracts. 

  • Revenue from Singapore grew 11% driven by growth in ICT. Managed services revenue expanded 31.7% with continued on-boarding of government agencies to the G-Cloud platform. Data & Internet revenue also grew 6.1%. Revenue from Australia contracted 7% in local currency terms due to one-off project related to equipment sale last year.
  • Staff costs increased by 5% due to hirings for the ICT business. There was also a forex loss of S$3m. EBITDA from Singapore declined 3%. EBITDA from Australia declined 9% in local currency terms. Trustwave contributed revenue of S$73m and EBITDA of S$2m.
  • NCS has maintained a healthy orderbook of S$2.3b. NCS, together with its consortium partner, has secured the contract for next-generation electronic road pricing (ERP) system that utilise advanced satellite technology for congestion management. Singtel maintained its leadership in international IP-VPN in Asia Pacific and domestic data in Singapore. It has also enhanced its capabilities in cyber security, cloud computing and smart nation solutions.

• Group Digital Life: Striving to achieve synergy. 

  • Amobee’s advertising revenue from mobile, video and social media grew 12.4% yoy. Operating expenses were reduced by 3.4% yoy. Negative EBITDA was cut by 38% yoy due to increased scale at Amobee and business rationalisation. Amobee secured new customers Airbnb, Red Bull and Paypal during the quarter.
  • Group Digital Life has sharpened its focus to three key businesses, namely digital marketing (Amobee), regional premium video (HOOQ) and advanced analytics & intelligence (DataSpark). There were more collaborations with associates within the group. AIS utilised DataSpark’s geo-spatial analytics capability to migrate subscribers from 2G to 3G/4G. Similarly, Telkomsel tapped DataSpark in its roll out for 4G LTE.

• Regional Mobile Associates: Telkomsel stole the limelight. 

  • Earnings contributions from regional mobile associates grew 12.3% yoy.
  • Telkomsel added 1m subscribers in 4QFY16 and its subscriber base expanded 8.6% yoy. It has 72m data customers, which accounted for 47% of its subscriber base. Operating revenue grew 18% driven by growth of 9% for voice and 49% for data. EBITDA increased 27% despite higher operation & maintenance costs from the accelerated rollout for 3G and 4G. PBT grew 32% after accounting for the 1.9% depreciation of Rupiah against the S$.
  • Bharti added 7.9m subscribers in 4QFY16 and its subscriber base expanded 11% yoy in India. Operating revenue grew 10% driven by growth of 69% for data traffic and 12% for data ARPU. EBITDA from India surged 14% with tight control on operating expenses.
  • Revenue from Africa rose 4% driven by data and “Airtel Money” services. Data revenue grew 43% in local currency terms due to higher usage and data penetration. EBITDA from Africa increased 10% with focus on cost efficiencies. On a group basis, PBT from Bharti increased 3.7% to S$183m after accounting for spectrum related finance costs, interest on finance lease for towers and 4.8% depreciation of Rupee against the S$.
  • AIS gained 0.4m subscribers in 4QFY16. It has a subscriber base of 39m, of which 98% has migrated to 3G. Service revenue was stable despite intense competition. EBITDA declined 2% due to higher USO fees, which offset the positive impact of lower regulatory costs from migration to 3G. PBT was stable due to lower depreciation on fully depreciated 2G assets. Earnings contribution from AIS declined 6.2% to S$112m due to the 5.8% depreciation of Baht against S$.
  • AIS has launched 4G services on 1800MHz in 77 provinces. It aims to achieve population coverage of 50% for 4G by Dec 16. National Broadcasting & Telecommunications Commission (NBTC) has scheduled to re-auction the 900MHz spectrum on 27 May 16, following payment default by Jasmine.
  • Globe Telecom added 0.9m subscribers in 4QFY16 and its subscriber base expanded 18% yoy. Service revenue increased 14% boosted by an expanded customer base for mobile and broadband and growth from mobile data. EBITDA grew 18% despite higher network costs. Unfortunately, PBT increased by only 1% due to higher depreciation arising from consolidation of BayanTel and higher interest expenses. Earnings contribution from Globe was stable at S$88m due to the 2.7% depreciation of Peso against S$.
  • BayanTel is a provider of data and communications services such as dedicated domestic and international leased lines, frame relay services, Internet access and managed data services.
  • NetLink Trust’s operating revenue grew 27% due to a 30% increase in its residential customer base. EBITDA increased by 68%. NetLink Trust recorded net profit of S$18m before amortisation of deferred gain.



STOCK IMPACT


• Guidance for FY17. 

  • Revenue and EBITDA is expected to grow at low single-digit on a group basis. 
  • Revenue from Singapore mobile should be stable while revenue from Australia mobile is expected to decrease by low teens due to the decline in mobile termination rates. 
  • Group ICT revenue should grow by low teens. 
  • Cyber security specialist TrustWave is expected to contribute revenue of S$450m-550m.
  • Amobee revenue is expected to grow by mid single-digit. Negative EBITDA from Group Digital Life is expected to widen to S$150m-180m as HOOQ and DataSpark ramp up and scale up. Group Digital Life will focus on collaborations with telcos within the group in FY17.
  • Capex has increased slightly from S$2.3b to S$2.4b.

• Stable dividends. 

  • Singtel has declared final dividend of 10.7 cents for FY16, unchanged compared to last year.

• DataX2 boost usage of data. 

  • Singtel has launched DataX2 that doubles data allowance for new and re-contracting customers at a flat fee of S$5.90/month in mid-March. The new feature was designed to incentivise data-oriented customers to stay on their higher-tier plans to obtain a larger add-on and upsize option. Customers who regularly exceed their data allowances would find DataX2 particularly useful. 
  • Management has not seen any visible trend of customers trading down to lower-tier plans.

• Winning over the BPL fans. 

  • Optus has launched Barclays Premier League (BPL) in Australia. 
  • Its post-paid mobile, mobile broadband and home broadband customers can sign up for BPL at S$15/month. BPL will be included free for bundled plans valued at S$85/month and above. Consumers need to be an Optus customer to get BPL. There are 1.7m BPL viewers in Australia and Optus targets to win them over as loyal high-value customers.

• Additional spectrum caters for expansion to regional Australia. 

  • Optus has successfully acquired 1800MHz spectrum of 2x20MHz in five regions and 2x25MHz in seven regions for S$196m. The new spectrum is in contiguous lots with alignment between its metropolitan and regional spectrum assets, thus reducing dead zones and giving customers a seamless 4G experience across urban and rural boundaries.
  • The new spectrum would support growth in demand for data services in regional Australia. Optus’ mobile network currently covers 98.5% of population and its 4G services are available to 90% of population.



EARNINGS REVISION/RISK

  • We raised our net profit forecast by 1.3% and 0.7% for FY17 and FY18 respectively, after factoring in stabilisation of the A$ exchange rate and slightly higher capex of S$2.4b in FY17.



VALUATION/RECOMMENDATION

  • Maintain BUY. Our target price is S$4.38, based on DCF (COE: 5.8%, terminal growth: 1.0%).



SHARE PRICE CATALYST

  • Singtel is the least affected by a fourth mobile operator in Singapore as overseas businesses accounts 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 UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-13
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.38 Down 4.41


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