SingTel - CIMB Research 2017-09-22: Yields And Safety In FY18F; Growth From FY19F

SingTel - CIMB Research 2017-09-22: Yields And Safety In FY18F; Growth From FY19F SINGTEL Z74.SI

SingTel - Yields And Safety In FY18F; Growth From FY19F

  • FY18F core EPS to ease 2.5% due to decline at Optus and largely flat associate earnings contribution, but partly cushioned by narrower Digital Life losses.
  • FY19F/20F core EPS to rise by 4.2%/4.1% yoy as associate earnings growth resume, led by Telkomsel and Bharti.
  • We maintain our Add call on SingTel with a target price of S$4.10. Attractive yields of 4.8-5.2%.

Optus’s profits to decline in FY18F-20F

  • Further mobile/fixed network improvements and content differentiation will help drive more subscriber share gains at Optus, in our view. However, we see EBITDA slipping 1.1% in FY18F due to lower enterprise margins as well as higher device subsidies and content cost, partly offset by rising consumer revenue. 
  • Core net profit should fall by a bigger 8.8%, dragged by rising depreciation and interest costs on higher capex. We expect its earnings contribution to Singtel to decrease by 9.9% in FY18F, partially buffered by a 1% stronger Aussie dollar vs. Singapore dollar. 
  • Assuming stable currency, we forecast Optus contribution to decline 4.3% in FY19F and then by a steeper 9.2% in FY20F on more intense mobile competition from TPG.

Singapore earnings to improve in FY18F

  • We expect consumer service revenue/EBITDA to ease 1.9%/5.4% in FY18F. However, this should be more than offset by
    1. narrower LBITDA of S$103m (FY17: -S$122m) at Digital Life (DL) on stronger Amobee performance and the full year consolidation of Turn, and
    2. 1.0% growth in enterprise EBITDA on higher revenue from managed services.
  • Overall, we expect Singapore EBITDA/core net profit to rise 2.3%/1.3% in FY18F. We then project steady Singapore core net profit in FY19F before it falls by 2.8% in FY20F due to keener mobile competition post TPG’s market entry.

FY18F associates earnings hampered by AIS and Bharti

  • In Singapore dollar terms, we expect the share of associate earnings to decline by 0.4% in FY18F (FY17: +8.9%). We forecast milder 8.6% growth at Telkomsel (FY17F: 24.9%), partly offset by lower earnings at AIS (-14.8%), Bharti (-12.4%) and Globe (- 4.6%). 
  • We see associate earnings resuming stronger growth of 10.4%/12.0% in FY19/20F, driven by Telkomsel and Bharti.

Guidance on capital management initiatives in 1HFY18 results

  • Singtel received total cash proceeds of S$2.195bn (S$0.13/share) from the NetLink NBN Trust’s IPO exercise in Jul 17, which included a S$1.1bn unitholder loan repayment. Singtel has said that it will provide guidance with regards to the utilisation of cash proceeds when it announces its 1HFY18 results in mid-Nov 17.
  • From a balance sheet perspective, we see no requirement for Singtel to use the cash proceeds to pare down debt. 
  • We project Singtel’s net debt/EBITDA to inch upwards from 1.31x to 1.37x at end-FY18F, then gradually ease to 1.35x/1.31x at endFY19F/20F. This is within its optimal gearing level of 1.0-1.5x. However, we cannot rule out Singtel conserving some cash for future capex or M&A plans.

Maintain Add; no change to target price of S$4.10

  • We keep our Add call with an unchanged SOP-based target price of S$4.10. 
  • Singtel’s FY18F EV/OpFCF of 17.3x is in line with the ASEAN telco average, supported by attractive FY18-20F yields of 4.8-5.2%. 
  • A potential re-rating catalyst is a special dividend after NetLink Trust’s recent listing. 
  • Downside risk: keener competition in Australia, India and Singapore. Singtel remains our preferred Singapore telco pick.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2017-09-22
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 4.100 Same 4.100