SingTel - CIMB Research 2017-02-09: 3QFY17 Tracking forecast but Optus is a worry

SingTel - CIMB Research 2017-02-09: 3QFY17 Tracking forecast but Optus is a worry SINGTEL Z74.SI

SingTel - 3QFY17 Tracking forecast but Optus is a worry

  • Results largely in line, with 9MFY17 core net profit at 78% of our FY17 forecast.
  • Singapore earnings grew on lower opex and narrower DL losses. Higher associate earnings were driven by Telkomsel and Globe.
  • Optus earnings fell on keen competition and higher device subsidies/content costs.
  • We cut FY18-19F EPS by 8-11% to factor in lower earnings at Optus and Bharti.
  • Maintain Add with 9% lower target price of S$4.10. Attractive yields of 4.6-4.9%.

3QFY17 results largely in line despite weaker Optus

  • Singtel’s 3QFY17 core net profit rose 4.2% yoy (+1.6% qoq). This was largely in line, with 9MFY17 at 78% of our FY17 forecast (consensus: 75%). 
  • Singapore profits were up 7.6% yoy while associate earnings rose 6.1% yoy. This was partly offset by lower profits at Optus (-12.7% yoy). In constant currency terms, core net profit was up 2.5% yoy.
  • Singtel still guides for FY17 revenue to fall by low single-digit and stable EBITDA.

Singapore: Up due to consumer growth and narrower Digital Life’s (DL) losses 

  • Singapore EBITDA was up 1.6% yoy (-8.6% qoq) in 3QFY17. Consumer EBITDA rose 6.2% yoy due to lower staff and traffic cost. Enterprise EBITDA fell 4.3% yoy, with higher revenue more than offset by a 1.8% pts drop in margin (cyber security/ICT investments, mobile acquisition/retention cost). 
  • Digital Life’s (DL) negative EBITDA narrowed 29.1% yoy to S$23m. 
  • Core net profit in 3QFY17 was up 7.6% yoy (-10.0% qoq), boosted by lower depreciation and net interest cost.

Optus: Weaker quarter on higher cost but strong mobile net adds 

  • Optus’s service revenue fell 14.2% yoy (-0.4% qoq) in 3QFY17 on lower mobile revenue (-21.8% yoy) due to termination rate (MTR) cuts since Jan 2016. 
  • Postpaid subs grew by another strong 90k qoq (+1.9%), driven by differentiated content offerings (EPL), while prepaid users rose 43k qoq (+1.2%). 
  • Blended ARPU was down 22.7% yoy (ex-MTR changes: flat yoy), but steady qoq. 
  • EBITDA fell 5.2% yoy (+2.7% qoq) on higher device subsidies and content cost. 
  • The margin rose 1.3% pts yoy (-0.5% pts qoq) to 29.5%.

Associate earnings: Improvement led by Telkomsel and Globe 

  • Associate contributions in S$ improved 6.1% yoy due largely to Telkomsel (+30.7%) and Globe (+53.4%). 
  • Qoq, associate earnings fell 2.6%, led by Bharti (-47.5%), partly buffered by higher earnings at AIS (+14.9%). 
  • 9MFY17 associate earnings were slightly ahead of expectations at 78% of our FY17 forecast.

FY18F-19F core EPS cut for lower Optus and Bharti earnings 

  • We tweak our FY17F core EPS by +1.0% after the 3QFY17 results and cut FY18F/19F core EPS by 8.2%/11.2%, mainly to factor in lower earnings at Optus and Bharti. Post revision, we forecast Singtel’s core EPS to be flat in FY17F and inch lower by 1.5% in FY18F. 
  • We expect earnings to be flat in Singapore and to fall at Optus, given heightened competition and rising depreciation due to high capex. We then see 6.5% yoy growth in FY19F due to Optus recovery and continued growth at associates.

Maintain Add call with 9% lower SOP-based target price of S$4.10 

  • We keep our Add call with 9% lower SOP-based target price of S$4.10, after factoring in lower fair values for Optus, AIS, Bharti and Globe. 
  • Singtel’s FY18F EV/OpFCF of 19.4x is at a 15% premium over the ASEAN telco average, supported by attractive FY17-19F yields of 4.5-4.9%. 
  • A potential re-rating catalyst is the declaration of a special dividend after the IPO of NetLink Trust
  • Downside risk is more intense competition in Australia, India and Singapore. 
  • Singtel is our preferred Singapore telco pick.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2017-02-09
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 4.100 Down 4.500