SingTel - CIMB Research 2016-12-05: Yields & safety for now, growth in FY18-19F

SingTel - CIMB Research 2016-12-05: Yields & safety for now; growth in FY18-19F SINGTEL Z74.SI

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

  • Optus: FY17F earnings to be held back by rising depreciation and falling A$.
  • S’pore: flattish FY17F consumer & enterprise EBITDA; wider Digital Life losses.
  • Associates: to be dragged by dip at AIS and flat contribution from Bharti & Globe in FY17F. 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 of 4.7-5.6%.

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 FY17F but core net profit rising by a more modest 3.6% due to increases in depreciation and interest costs on higher capex.
  • We expect its earnings contribution to SingTel to rise by only 1.6% in FY17F as we assume the A$ will dip 2% to parity with S$. On stable currency, we forecast Optus contribution to rise 4.9%/1.4% in FY18/19F.

Singapore earnings to be slightly under pressure in FY17F

  • We see consumer EBITDA rising by only 0.9% in FY17F on flat mobile service revenue. While the cybersecurity business looks promising, we see flat enterprise EBITDA in FY17F with price pressure from National Broadband Network (NBN) players and Trustwave only breaking even.
  • As SingTel ramps up HOOQ (premium video streaming service), we project a wider LBITDA of S$164m (FY16F: -S$137m) at Digital Life. Overall, we expect Singapore EBITDA to fall 1.0% while core net profit to drop by 6.2%.

AIS a drag on associates earnings growth in FY17F 

  • In S$ terms, we expect the share of associate earnings to be flat in FY17F (FY16F: +9.5%). We forecast strong 12.3% growth at Telkomsel, largely offset by a 29.4% drop in AIS’s earnings (1800MHz license amortisation, handset subsidies) in FY17F.
  • Contribution from Bharti and Globe should be largely steady yoy, in our view. We see associate earnings expanding by a stronger 11.2%/17.6% in FY18/19F, driven by Telkomsel and Bharti.

Possible special dividend from NLT spinoff but 12-18 months away 

  • We believe SingTel is likely to spin off 100%-owned NetLink Trust (NLT) in an IPO by 2H17, in line with its undertaking to Infocomm Development Authority of Singapore (IDA) to pare down 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 our estimated valuation of S$2.5bn-3.5bn for NLT. On the back of this, we think it is likely that SingTel will declare a special dividend, possibly in its 4QFY18 results announcement.

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

  • Singtel’s FY18F EV/OpFCF of 16.9x is at a 21% premium over the ASEAN telco average but this is supported by attractive FY17-19F yields of 4.7-5.6%. 
  • 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.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2016-12-05
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 4.500 Same 4.500