SingTel - CIMB Research 2016-11-10: 2QFY17 Associates help to buffer weak Optus

SingTel - CIMB Research 2016-11-10: 2QFY17 Associates help to buffer weak Optus SINGTEL Z74.SI

SingTel - 2QFY17 Associates help to buffer weak Optus

  • 2QFY17 core net profit up a marginal 0.4% yoy. Higher associate earnings offset by lower profits at Optus and in Singapore.
  • Results in line, with 1HFY17 core net profit at 51% of our FY17 forecast.
  • Maintain Add with unchanged target price of S$4.50. Attractive yields of 4.5-5.5%.

2QFY17 results in line despite weak Optus

  • SingTel’s 2QFY17 core net profit rose a marginal 0.4% yoy (+2.5% qoq). This was in line, with 1HFY17 at 51% of our FY17 forecast (consensus: 49%). 
  • Associate earnings rose 10.8% yoy, which was largely offset by lower profits at Optus (-18.7% yoy) and in Singapore (-6.6% yoy). A 1HFY17 DPS of 6.8 Scts was declared (1HFY16: 6.8 Scts).
  • SingTel lowered its FY17 guidance: 
    1. revenue to fall by low single-digits (previous: low single-digit growth) on steeper mid-teens decline at Optus (previous: low-teens) due to heightened competition; and 
    2. EBITDA to be stable (previous: low single-digit growth).

Singapore: Narrower DL losses

  • EBITDA rose 1.1% yoy (+0.2% qoq) in 2QFY17 on higher service revenue, which offset a 1.2%-pt margin erosion to 31.7%. Consumer EBITDA fell 1.9% yoy on lower other income (otherwise, +2.6% yoy). 
  • Enterprise EBITDA was flat yoy, with higher revenue offset by a lower margin. Digital Life’s (DL) negative EBITDA narrowed 17.6% yoy to S$28m.
  • Core net profit in 2QFY17 was down 6.6% yoy (+4.5% qoq) due to higher depreciation and higher net interest cost.

Optus: A weak quarter but strong postpaid mobile net adds

  • Optus’s service revenue fell 11.4% yoy (+2.5% qoq) in 2QFY17 on lower mobile revenue (-20.6% yoy) due to termination rate (MTR) cuts since Jan 2016. 
  • Postpaid subs grew by a healthy 91k qoq (+1.9%), the strongest in four years, while prepaid users fell 21k qoq (-0.6%). Blended ARPU was down 20.9% yoy (ex-MTR changes: +2.0% yoy) but steady qoq.
  • EBITDA fell 10.3% yoy (-1.9% qoq) on higher cost of sales due to content investments (BPL) and higher equipment cost. The margin eased 0.5% pts yoy (- 2.3% pts qoq) to 30.0%.

Associate earnings: Improvement led by Telkomsel and Bharti

  • Associate contributions in S$ improved 10.8% yoy due largely to Telkomsel (+22.2%) and Bharti (+73.3%). 
  • Qoq, associate earnings fell 3.4%, led by AIS (-29.7%) and Globe (-41.3%), partly buffered by higher earnings at Telkomsel (+12.2%). 
  • 1HFY17 associate earnings were ahead of expectations at 54.9% of our FY17 forecast.

Maintain Add call and SOP-based target price of S$4.50

  • SingTel’s FY18F EV/OpFCF of 17.3x is at 16% premium over the ASEAN telco average but this is supported by attractive FY17-19F yields of 4.5-5.5%. 
  • Downside risks are more intense competition in Australia, India and Singapore. SingTel is our preferred Singapore telco pick as it: 
    1. has a better medium-term earnings growth outlook, and 
    2. will be least impacted by the potential entry of a fourth mobile player.

LIM Siew Khee CFA CIMB Research | http://research.itradecimb.com/ 2016-11-10
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 4.500 Same 4.500