SingTel - RHB Invest 2017-12-19: The Better Of The Pack

SingTel - RHB Invest 2017-12-19: The Better Of The Pack SINGTEL Z74.SI

SingTel - The Better Of The Pack

  • We project FY18-20 core earnings and revenue CAGR of 5.3% and 2% respectively. This is against the backdrop of heightened competitive risks (Singapore, Australia, Indonesia and India) but with cost management as a central theme, providing some margin buffer. 
  • Post the special DPS from the listing of Netlink NBN Trust, we see few re-rating catalysts. 
  • Maintain NEUTRAL and a SOP-derived TP of SGD4.10 (8% upside). 
  • Singtel remains our Preferred Singapore telco Pick, supported by its diverse exposure and attractive forward dividend yields of 4.7-5.5%. Competition is the key risk.

Gearing up for more domestic headwinds. 

  • We expect the strong demand for SIM-only plans to further dilute postpaid ARPU despite higher data usage. Postpaid ARPU fell for the third consecutive quarter to SGD64.00 in 2QFY18 (Mar) (1HFY18: -7.2% YoY), and now trails StarHub’s (STH SP, NEUTRAL, TP: SGS2.70) ARPU of SGD69.00 (including international direct dialling (IDD)), given Singtel’s larger roaming exposure (hence higher data cannibalisation) and large proportion of silver hair customers (lower ARPU/lower data). 
  • Higher handset subsidies from the launch of the iPhone 8/X series would also pressure Singapore consumer EBITDA margin from 3QFY18, as re-contracting activities intensify. 
  • Like its peers, Singtel also faces the threat of fresh competition with two new MVNOs (MyRepublic and redONE), set to roll out their mobile services in 2018.

Optus to focus on providing a superior network experience. 

  • Competition remains intense in Australia, although largely concentrated at the lower end (TPG/Vodafone Hutchison). 
  • We believe Optus is likely to sustain its postpaid ARPU and strong subscriber additions, due to good bundling activities and 4G network positioning (96.5% coverage in 3Q17) with massive MIMO (multiple- input multiple output) and tri-band carrier aggregation launched across major cities. Optus’ mobile service revenue grew 2% YoY in 2QFY18 (1HFY18: +1.8% YoY), excluding device repayment plan (DRP).

Enterprise margins under pressure from the change in mix. 

  • Group enterprise revenue was up 3.3% YoY, but EBITDA fell 3.2% in 1HFY18, due to higher proportion of info-communications type (ICT) businesses.

Digital life profitability within sight. 

  • The group’s digital life (GDL) business is on track to break even in FY18, with Amobee turning EBITDA positive to the tune of SGD11m in 2QFY18. 
  • GDL EBITDA loss totalled SGD38m in 1HFY18 (FY17: SGD120m loss).

Weak signals still, at associates. 

  • In India, Airtel’s ARPU slipped to a record low of INR45.00 in 3Q17, on disruptive price competition. 
  • The SIM registration process in Indonesia - which started in late October - has also sparked off a fresh round of pricing aggression, with Telkomsel and Indosat (ISAT) (ISAT IJ, NEUTRAL, TP: IDR6,600) sacrificing data yields. 
  • Telkomsel and Airtel make up c.70% share of associates and remain the key drags, driving the 11.5% QoQ (-10.6% YoY) decline in associate contributions (before exceptionals) in 2QFY18.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-12-19
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 4.100 Same 4.100