SingTel (ST SP) - DBS Research 2017-11-09: Far Ahead Of Its Peers In Digital Transformation

SINGTEL Z74.SI

SingTel (ST SP) - Far Ahead Of Its Peers In Digital Transformation

SingTel's 2Q18 underlying profit of S$929m (-5.0% y-o-y, +2.1% q-o-q) was in line with our/consensus expectations.
Declared interim DPS of 6.8 Scts plus special DPS of 3 Scts per share (versus our expectation of 6 Scts special).
Achieved positive EBITDA in digital advertising business, ahead of its guidance of EBITDA breakeven in FY18F.

Excluding S$1.96bn oneoff gains, underlying profit of S$829m (-5.0% y-o-y, +2.1% q-o-q) was in line with consensus expectations of S$916m. The annual drop was due to Bharti’s earnings falling 52% yo-y to S$83m on account of intense competition in India.
Besides, Singtel declared interim DPS of 6.8 Scts (60% payout) plus special DPS of 3 Scts per share (~S$500m in special versus our ~S$1bn expectations).

While many telcos struggle with their regular dividends, Singtel on top of its regular dividends, is in a position to invest S$1bn in growth companies without exceeding 2.0x net debt to EBITDA as per our estimates.
Growth business (ICT and digital) comprised ~25% of Singtel’s revenue and may rise to an estimated 40% of revenue in five years.

Consolidated EBITDA of S$1,292m (+4.7% y-o-y, +1.8% q-o-q) was 2% above our estimates, offset by higher depreciation and amortisation.

Digital advertising arm Amobee achieved positive EBITDA of S$11m (versus EBITDA breakeven in 1Q18) for the very first time, supported by contribution from recently acquired Turn.
Overall, Group Digital Life segment, which also includes HOOQ and DataSpark, had EBITDA losses narrowing 50% yo-y to S$14m, better than our expectation of a S$25m loss.
Growth business comprise ~25% of Singtel’s revenue and may comprise over 40% in five years. Infocomm Technology (ICT) made up 19% while Group Digital Life accounted for 6% in 2Q18. With double-digit growth, these businesses could easily contribute over 40% of Singtel’s revenue in five years organically.

Bharti’s earnings could grow over ~30% in FY19F from potential rebound in revenue. Bharti has been leading the consolidation in the industry and has been most aggressive with counter-offers. The most recent example is the tie-up with Karbonn mobile which is probably better than JIO’s feature phone offering.
Potential rebound in Bharti’s revenues in FY19F could drive huge operating leverage as costs have been tightly controlled. This should more than offset slow or negligible earnings growth at Telkomsel in our estimates.

Singtel’s core plus digital business is trading at only 5.6x FY18F EV/EBITDA versus 7x for M1, 9x for StarHub and 7.5x regional telco average.
Despite ~35% rise in the valuation of regional associates over the last three years, the stock has been flattish, perhaps due to mounting losses in the digital businesses. However, with digital advertising arm Amobee achieving an earlier-than-expected positive EBITDA in 2Q18, and official guidance for narrower digital losses in FY18F, we expect the valuation discount to disappear.

We use a sum-of-the-parts (SOTP) valuation for Singtel to derive a target price of S$4.30.
The stock offers ~14% upside potential in addition to a ~5% yield.

Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2017-11-09

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