SingTel - CIMB Research 2016-06-20: Yields & safety for now; growth in FY18-19

SingTel - CIMB Research 2016-06-20: Yields & safety for now; growth in FY18-19 SINGTEL Z74.SI 

SingTel - Yields & safety for now; growth in FY18-19

  • Optus: FY17 earnings to be held back by rising depreciation and falling A$.
  • S’pore: flattish FY17 Consumer & Enterprise EBITDA. Wider Digital Life losses.
  • Associates: dragged by dip at AIS and flat contribution from Bharti & Globe in FY17. 
  • NetLink Trust selldown could result in special DPS of 12.6-17.6 Scts.
  • Maintain Add with unchanged target price of S$4.50. Attractive yields: 4.5-5.5%.

Optus’s profits to be held back by rising depreciation, falling A$

  • Further mobile/fixed network improvements and content differentiation will help drive more subscriber share gains at Optus, in our view. 
  • We see EBITDA growing a healthy 5.9% in FY17 but core net profit up by a more modest 3.6% due to a rise in depreciation and interest costs on higher capex. 
  • Earnings contribution to SingTel is expected to rise by only 1.6% as we assume the A$ will drop by 2% to parity with S$. 
  • On stable currency, we forecast Optus contribution to grow 4.9%/1.4% in FY18/19.

Singapore earnings to be slightly under pressure in FY17

  • We see consumer EBITDA up by only 0.9% in FY17 on flat mobile service revenue. Although the cybersecurity business looks promising, Enterprise EBITDA should be flat in FY17 with price pressure from NBN players and Trustwave only breaking even. 
  • As SingTel ramps up HOOQ, we project a wider LBITDA of S$164m (FY16: -S$137m) at Digital Life. 
  • Overall, we expect Singapore EBITDA to fall 1.0% while core net profit to drop by 6.2% on rising depreciation (higher capex) and Trustwave goodwill amortisation.

AIS to drag associates earnings growth in FY17

  • In S$ terms, the share of associate earnings is expected to be flat in FY17 (FY16: +9.5%). 
  • We forecast a strong 12.3% growth at Telkomsel, largely offset by a 29.4% drop in AIS’s earnings (1800MHz license amortisation, handset subsidies). 
  • Bharti’s and Globe’s contribution should be largely steady yoy. We see associate earnings growing by a stronger 11.2%/17.6% in FY18/19, driven by Telkomsel and Bharti.

FY17-18 core EPS cut by 3-5%

  • We cut our FY17-18 core EPS for SingTel by 3.0-5.1%, due to lower associate and Singapore earnings forecasts. 
  • We now see core net profit for SingTel easing 1.0% yoy in FY17 and DPS maintained at 17.5 Scts for a third consecutive year. 
  • Earnings growth should pick up to +8.4%/+10.1% in FY18/19, with DPS rising to 19.2/21.2 Scts.

Possible special dividend from NLT spinoff but 18-24 months away

  • SingTel is likely to spin off NetLink Trust (NLT) in an IPO by 2H17, in line with its undertaking to IDA to divest its stake to less than 25% by 22 Apr 2018. An 80% stake sale could raise S$2.0bn-2.8bn (12.6-17.6 Scts/share) cash, based on an estimated valuation of S$2.5bn-3.5bn for NLT. On the back of this, we think it is likely for SingTel to declare a special dividend, possibly in its 4QFY18’s results announcement.

Maintain Add with unchanged target price of S$4.50

  • SingTel is still our preferred pick for Singapore telcos due to 
    1. its better medium-term earnings growth outlook and 
    2. it will be least impacted by the potential entry of a fourth mobile player. 
  • Although its FY18 EV/OpFCF of 17.2x is at a 26% premium to the ASEAN telco average, SingTel offers superior yields of 4.5-5.5%. 
  • Maintain Add. 
  • Key downside risks: weaker-than-expected A$ and Rp and more intense competition.

FOONG Choong Chen CFA CIMB Securities | http://research.itradecimb.com/ 2016-06-20
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 4.50 Same 4.50