Singapore Telecommunications (ST SP) - Maybank Kim Eng 2017-02-10: Outperformed in 3Q17 by not disappointing

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SINGTEL Z74.SI

Singapore Telecommunications (ST SP) - Outperformed in 3Q17 by not disappointing

Stands out for lack of negative surprises; HOLD 

• 3Q17 net profit was in line with our estimate, with 9M17 at 75% of our full year forecast. This is a much better result than its rivals and Singtel has reaffirmed its full-year guidance. 
• Still, given heightening competition in FY3/18, we can expect stable performance at best. Fortunately, Singapore Consumer accounts for only 15% of group revenue/EBITDA. 
• Maintain HOLD with unchanged forecasts and DCF-based TP of SGD3.70 (WACC 5.4%, LTG 1%). 
• Two major catalysts could balance each other out - spectrum auction (potential negative) and a spin-off (potential positive).

3M17 in line / 9M17 at 75% of FY forecast 

• The quarter was uneventful, boosted by favourable currency movements. 
• Singapore (both consumer and enterprise) and regional associates carried the day, with Optus down YoY in AUD terms on intense competition in both Enterprise and Consumer, but SGD results were propped up by a stronger AUD. 
• For 3Q17, revenue decreased 1.5% YoY (+3% if lower mobile termination rates excluded), EBITDA was stable, associates +2.8% and underlying net profit +4.2% helped by a 4% AUD gain (+2% YoY if constant currencies are assumed).

Doing much better than rivals 

• This is a much better set of results than either M1 or StarHub’s, which were hit by cost or capex issues, as well as cuts to dividends or dividend outlooks. However, Singtel’s financial year-end is March and it has not yet given its FY03/18 outlook. Given the precedents set by its rivals, we can expect stable performance at best. 
• On the bright side, the Singapore consumer business (that will soon be beset by a new competitor) accounts for only 15% of group revenue and EBITDA.

Two major catalysts in 2017 

• We see two major catalysts in 2017: 
  1. the General Spectrum Auction (GSA); and 
  2. NetLink Trust (NLT) spin-off. 
• GSA is potentially negative as TPG’s participation will certainly raise the level of market competition. We have currently assumed spectrum payouts of SGD135m for Singtel and SGD105m each for M1 and StarHub. 
• On the flip side, a government-mandated IPO for NLT by Apr 2017 could mean potential capital returns to shareholders. However, it is still early days with the IPO process having just gotten underway.

Swing Factors

Upside

• TPG does not participate in the General Spectrum Auction. The three incumbents get to keep most of their spectrum allocations at the expected spectrum cost.
• AUD reverses its weakening trend against SGD. Every 1% gain in AUD translates to a 0.5% rise in Optus revenue (Optus accounts for c.55% of group revenue).

Downside

• May not be able to maintain 60-70% dividend payout if it needs cash to pay for bigger-than-expected spectrum or network investments.
• TPG launches its services earlier than the expected 2018 or StarHub and M1 become more aggressive than expected in price-cutting ahead of TPG’s entry.

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-02-10

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 3.70 Up 3.680