SingTel - CIMB Research 2018-03-14: Yields And Safety In FY18F; Growth From FY19F

SingTel - CIMB Research 2018-03-14: Yields And Safety In FY18F; Growth From FY19F SINGTEL Z74.SI

SingTel - Yields And Safety In FY18F; Growth From FY19F

  • SingTel's FY18F core EPS to ease 8.3% due to declines at Optus and associate earnings contribution but partly cushioned by narrower Digital Life losses.
  • FY19F/20F core EPS to rise by 2.2/7.4% y-o-y as associate earnings growth resume, led by Telkomsel and Bharti.
  • Maintain ADD with an unchanged target price of S$4.00. Attractive yields of 4.9-5.4%.

Optus’s profits to decline in FY18F-19F

  • Further mobile/fixed network improvements and content differentiation will help drive subscriber share gains at Optus, in our view. We see EBITDA rising 3.1% in FY18F due to higher consumer and enterprise revenue, partly offset by rising content, staff and traffic cost. However, we expect core net profit to fall 3.9%, dragged by rising depreciation and interest costs on higher capex. We expect its earnings contribution to Singtel to decrease by 4.1% in FY18F on largely steady A$ vs. S$. 
  • Assuming stable currency, we forecast Optus’s contribution to decline by a steeper 9.8% in FY19F on lower National Broadband Network (NBN) migration payments (due to 6-9 months’ suspension of new NBN orders) and further increase in depreciation and interest cost, before recovering to rise 5.3% in FY20F.

Singapore earnings to ease in FY18F

  • We expect consumer service revenue/EBITDA to ease 3.1%/3.9% in FY18F. However, this should be more than offset by narrower LBITDA of S$68m (FY17: - S$122m) at Digital Life (DL) on stronger Amobee performance and the full-year consolidation of Turn. 
  • Meanwhile, enterprise EBITDA is estimated to fall 1.8% on further margin erosion.
  • Overall, we expect Singapore EBITDA/core net profit to grow/decline by 1.0%/3.3% 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 associate earnings hampered by AIS and Bharti

  • In Singapore dollar terms, we expect the share of associate earnings to decline by 9.0% in FY18F (FY17: +8.9%). 
  • We forecast milder 1.0% growth at Telkomsel (FY17: +24.9%), largely offset by lower earnings at AIS (-11.0%), Bharti (-56.4%) and Globe (-7.1%). 
  • We see associate earnings resuming stronger growth of 7.4%/12.9% in FY19/20F, driven by Telkomsel and Bharti.

Group FY18F-20F earnings outlook

  • Overall, we expect the group’s core EPS to fall by 8.3% (FY17: +2.0%) in FY18F mainly due to weaker contribution from Optus and associate earnings. This is, however, partly cushioned by narrower DL losses. Meanwhile, we forecast a turnaround in FY19/20F core EPS (+2.2/+7.4%), driven by higher earnings contributions from associates.
  • On a payout ratio of 75% in FY18F-20F, we forecast FY18/19/20F DPS of 16.7/17.1/18.4 Scts. 
  • We project Singtel’s end-FY18/19F net debt/EBITDA to remain steady at 1.36x/1.37x, then gradually ease to 1.27x at end-FY20F. This is within its optimal gearing level of 1.0-1.5x.

Maintain ADD with an unchanged target price of S$4.00

  • Maintain ADD with an unchanged SOP-based target price of S$4.00. 
  • Singtel’s FY18F EV/OpFCF of 16.4x 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 risks include keener competition in Australia, India and Singapore.
  • Singtel is our preferred Singapore telco pick.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2018-03-14
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 4.000 Same 4.000