SingTel - RHB Invest 2016-11-11: Toning Down Optus

SingTel - RHB Invest 2016-11-11: Toning Down Optus SINGTEL Z74.SI

SingTel - Toning Down Optus

  • We trim our FY17-FY19 core earnings forecasts by 1-3% after factoring in lower revenue growth for Optus. 
  • Our SOP-based TP is consequently reduced to SGD4.00 (from SGD4.11, 4% upside), implying 13x CY17 EV/EBITDA. 
  • We maintain our NEUTRAL recommendation on Singtel as valuations are fair given the competitive pressure it faced in Australia coupled with its decent dividend yield. 
  • Its lower dependence on the domestic mobile market makes it less vulnerable to the threat posed by the new mobile entrant. The stock remains our preferred SG telco pick.

Prepaid and MVNO headwinds in Australia. 

  • We expect competitive headwinds to persist in Australia on the back of pricing aggression, especially from the mobile virtual network operators (MVNO). This should further exert pressure on prepaid ARPUs in a slowing market. 
  • Telstra (TELS AU, NR) recently upped the ante with a AUD10 prepaid starter pack offering 6GB data (including 5GB bonus data) while Vodafone (VOD LN, NR) is dishing-out 3GB data for every AUD30 recharge. 
  • Postpaid revenue would also be crimped by the service credits on its device repayment plan (DRP) – implemented in Feb 2015 – until the impact washes through its postpaid base. We expect the strong postpaid net-additions in 2QFY17 to also manifest in ARPU pressure in 2HFY17 as the DRP impact is magnified. 
  • Optus said it would align the increase in cost with revenue trends, noting the benefits from the exclusive English Premier League (EPL) content. 
  • Management said it is keen on the 700MHz spectrum which would be put up for auction in 2017.

Singapore mobile business outperformed its peers. 

  • Management said its data upsized offer, DataX3, launched in September is value accretive with more data subscribers opting for the bigger allowance. Unlike peers, which have allowed in-contract customers to subscribe to the upsized packages (thereby exposing the base to down-trading activities), Singtel limits this to new and re- contracting customers. 
  • Average postpaid data usage has increased to 2.8GB/subs/mth from 2.6/subs/mth in 1QFY17. 
  • The stronger take-up of SIM- only plans (no disclosure on % take-up) during the quarter has nonetheless diluted postpaid ARPU, which fell 5.5% YoY to SGD69.

Enterprise is looking smart. 

  • Singtel is well poised to capitalise on the opportunities in the enterprise space. It is a major player in Singapore’s smart nation initiatives which has moved into the next phase of implementation while discussions are progressing for Australia’s smart nation project where the group recently rolled out a cyber security center. 
  • Group enterprise revenue expanded 5% YoY in 1HFY17, supported by cyber security (Trustwave), government infrastructure projects and on-boarding of government agencies on the G-cloud platform, which more than offset the decline in legacy carriage revenue.

Singapore Research Team RHB Invest | http://www.rhbinvest.com.sg/ 2016-11-11
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 4.00 Down 4.110