Singapore Telecommunications (ST SP) - Maybank Kim Eng 2016-11-10: No Data Downsize But No Upsize Either

SINGTEL Z74.SI

Singapore Telecommunications (ST SP) - No Data Downsize But No Upsize Either

Singtel dodged the data upsize bullet in Singapore, one of the reasons M1 (M1 SP, SELL, TP SGD1.90) cut its full-year guidance, but was tripped up by more mobile competition in Australia. Hence, though 2Q17 was in line, it has reduced its full-year guidance.
We now expect < 3% EPS growth, from c.5% previously. The higher Australian tax bill will not impact dividends; we keep payout at 70%, which we already reduced in Aug, vs its 60-75% policy range.

Our HOLD call is unchanged with DCF TP tweaked slightly to SGD3.68 from SGD3.70.
We are not positive on telcos but Singtel is nevertheless our top sector pick for relatively more resilient earnings, margins and cashflow.

2QFY17 was stable, with underlying NP flat despite -2% revenue.
Consumer business suffered from slower economies in Singapore (voice/IDD/roaming suffered from data substitution, offset by more data usage) and Australia (lower mobile due to keener competition). The bright spots were:
1. Enterprise, which still grew on more public sector IT initiatives; and
2. mobile data, where upsize plans did not upset ARPU or usage, unlike M1.

Underlying net profit was stable, excluding 2QFY16's divestment gain from Airtel's tower assets, mainly due to improved performance from regional associates, especially Airtel and Telkomsel.
FX movements did not have a meaning impact on this set of results as the currencies of bigger contributors such as Optus (AUD) and Telkomsel (IDR) were stable to higher YoY. FCF was up strongly due partly to distributions from Netlink Trust. The usual interim dividend of SGD6.8 cents was declared.

Singtel lowered its full-year guidance from low single digit “growth” to “decline” for revenue and stable for EBITDA. However, the main reason was due to increasing mobile competition in Australia rather than anything Singapore-centric.
We lower our FY17E revenue/NP forecast by 1%/1.5% respectively. It will also pay at least AUD134m in back-taxes for 2002 Optus acquisition financing but this will not impact dividends, and Singtel is confident of being able to recover it.

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, network or other investments, especially if associate dividends start to flag.

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-11-10

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 3.68 Down 3.700