SingTel - CIMB Research 2018-02-08: 3QFY18 Associates & Singapore Disappoint

SINGTEL Z74.SI

SingTel - 3QFY18 Associates & Singapore Disappoint

SingTel's 3QFY18 core net profit fell 8.0% y-o-y, mainly on lower Airtel and Singapore earnings.
Singapore’s EBITDA fell 1.6% y-o-y due to weaker consumer business, partly offset by 40% y-o-y narrower Digital Life’s (DL) LBITDA.
Optus’s EBITDA rose 13.7% y-o-y. Postpaid subs grew a record-high 127k q-o-q.
FY18F core EPS to ease 8.3% before recovering 2.2%/7.4% in FY19F/20F.
Maintain ADD with a 2% lower target price of S$4.00. Attractive yields: 4.9-5.4%.

Singtel’s 3QFY18 core net profit slightly missed expectations, with 9MFY18 forming 72%/ 72% of our/consensus FY18F forecasts (9MFY15-17: 74-75%).
Core net profit fell 8.0% yoy (-3.3% q-o-q), mainly due to lower associates (-14.3% y-o-y) and Singapore (-7.4% y-o-y) profits. These were partly offset by stronger-than-expected Optus's contribution (+23.2% yoy).
In constant currency terms, core net profit was down 6.0% y-o-y.

Singapore EBITDA eased 1.6% y-o-y (-9.7% q-o-q) while core net profit fell a steeper 7.4% yoy (+9.1% q-o-q) in 3QFY18 on higher interest cost and depreciation.
Consumer EBITDA fell 8.9% y-o-y on lower mobile revenue, higher handset subsidies and cessation of TV content rights sub-licensing revenue.
Despite lower revenue, enterprise EBITDA was flat y-o-y due to lower costs.
Digital Life’s LBITDA narrowed by 39.7% y-o-y to S$14m as Amobee posted positive EBITDA (S$20m), partly offset by HOOQ’s higher costs.

Service revenue rose 3.9% y-o-y (-0.5% q-o-q) on higher NBN migration and consumer mobile service revenue (+3.6% y-o-y). Consumer mobile service revenue rose 6.2% y-o-y, ex-device repayment plan (DRP) credit.
Postpaid subs grew a record-high 127k q-o-q (+2.5%) while prepaid users fell a further 29k q-o-q (-0.8%). Blended ARPU was steady yoy (+2%, ex-DRP) and q-o-q.
EBITDA rose 13.7% y-o-y (+11.8% q-o-q), partly boosted by higher other income (dispute settlement). Core net profit rose 25.1% y-o-y (+36.6% q-o-q).

Associate contributions fell 14.3% y-o-y due to Airtel (-48.7%), Telkomsel (-8.8%), Globe (- 47.2%) and lower contribution from NetLink Trust after a reduction in its stake to 25%. These were partly offset by higher profit at AIS (+22.6%) and full-quarter contribution from InTouch (+250%).
Q-o-q, associate earnings fell 13.8% mainly due to Telkomsel (-11.3%), Globe (- 51.9%) and Bharti (-18.2%). Associate earnings were partly impacted by weaker Rp (- 6.4% y-o-y, -2.4% q-o-q) and PHP (-8.0% y-o-y, -0.8% q-o-q) vs. S$.

We cut our FY18-20F core EPS by 3-6% to factor in
1. higher depreciation,
2. lower associate contribution (Telkomsel, Bharti, Netlink Trust) and
3. latest forex rates for associate currencies, which have largely weakened vs. S$.
Post-revision, we see core EPS declining by 8.3% in FY18F, before recovering by 2.2%/7.4% in FY19F/20F driven by stronger associate earnings (Bharti, Telkomsel, AIS) and lower Digital Life losses.

Maintain ADD with a 2.4% lower SOP-based target price after
1. our earnings cut,
2. rolling forward the base year to FY19F, and
3. factoring in higher fair values for AIS and Bharti, but lower for Telkomsel.
Singtel’s FY18F EV/OpFCF of 16.3x is in line with the ASEAN telco average, supported by attractive FY18-20F yields of 4.9-5.4%.
A potential re-rating catalyst is earnings recovery from FY19F.
Downside risk: keener competition in Australia, India and Singapore.
Singtel is our preferred Singapore telco pick.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2018-02-08

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 4.00 Down 4.100