Singtel - RHB Invest 2017-11-10: More Cash Please

Singtel - RHB Invest 2017-11-10: More Cash Please SINGTEL Z74.SI

Singtel - More Cash Please

  • We maintain NEUTRAL on Singtel with a revised SOP-derived SGD4.10 TP (from SGD3.90, 8% upside) after updating the valuations of its listed mobile assets. 
  • Competition remains tight in Singapore and Australia, with smaller operators/MVNOs steeping up the acquisition game. 
  • The special DPS of SGD0.03/share declared was a disappointment, in our view, as the market had anticipated more. 
  • SingTel's Share price is up 4% YTD, but has underperformed the STI by 3% over the past three months.

Bulk of proceeds earmarked for investments and spectrum. 

  • Management opted to conserve the bulk (78% of the SGD2.3bn proceeds from the sale of NetLink NBN Trust (NETLINK SP, NR) for potential spectrum opportunities and other/adjacent investments – little clarity was offered. 
  • We believe the lower quantum of payout (SGD0.03/share) was a disappointment, as the market had anticipated a bumper distribution – noting Singtel’s balance sheet headroom (net debt/ EBITDA: 1.2x), strong free cashflow of > SGD2bn, and that the last special payout was in FY11 (Mar). 
  • Management has retained its recurring DPS payout guidance of 60-75%.

SIM-only plans are the rage, but handset plans remain very much mainstream. 

  • Singtel expects the strong demand for SIM-only plans to further dilute postpaid ARPU. It continues to see a third of new subs taking up these plans, although the number only makes up a single percentage of total postpaid subs. Management said it would aggressively compete in the SIM-only market, which is seeing the likes of Circles.Life – a mobile virtual network operator (MVNO) – and M1 (M1 SP, Rating: NEUTRAL, Target Price: SGD1.90, see report: M1 - Rising Aggression) clawing revenue share. M1 also recently introduced a handset option for its SIM-only plans, which comes ahead of the iPhone X launch. 
  • Consumer mobile revenue was relatively stable QoQ, as the decline in usage and roaming revenues were partially offset by strong growth in data. The fall in roaming revenue appears to have stabilised at 16% of mobile revenue in 2QFY18, ie similar to the preceding quarter (2QFY17: 19%).

Competition still intense Down Under. 

  • Singtel Optus Pty Ltd (Optus) said the mobile environment remains competitive in Australia, with pricing aggressions predominantly at the lower-end of the market – this involves the MVNOs on bring your own device (BYOD)/SIM-only plans. The focus would continue to be on offering a superior product with good sub experience, backed by a premium network. 
  • On the latter, Optus plans to selectively replicate the world’s first 4.5G three cell massive Multiple-Input Multiple-Output (MIMO) channel aggregation technology (already launched in Sydney) to other cities to meet capacity needs. 
  • We view the MIMO rollout, which provides speeds of > 800Mbps, as a competitive advantage for Optus, reinforcing its network proposition.

Maintain NEUTRAL. 

  • We lower FY17F-19F core earnings by 5-6% after building in higher sub acquisition costs for Singapore. This is partially offset by the improvement in Optus’ operational margins from additional cost savings. 
  • Key risks are stronger-/weaker-than-expected competition, higher-/lower-than- expected capex, and extended earnings dilution from its digital investments.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-11-10
RHB Invest SGX Stock Analyst Report HOLD Maintain HOLD 4.10 Up 3.900