Singtel - DBS Research 2018-05-07: 4Q18F Preview ~ Negatives In The Price

Singtel - DBS Vickers 2018-05-07: 4Q18F Preview; Negatives In The Price SINGTEL SGX: Z74

Singtel - 4Q18F Preview; Negatives In The Price

  • FY18F/19F earnings trimmed 5%/10% mainly due to expected drop in Telkomsel’s contribution.
  • Expect 4Q18F underlying profit of S$824m (-17% y-o-y, -8% q-o-q) on 17 May due to weak Telkomsel & Bharti.
  • Maintain BUY with revised Target Price of S$3.85; core business is trading at a 20-30% discount to its peers.



Offers 6% earnings CAGR over FY18-20F with a decent 5% dividend yield.

  • Singtel is a unique telco-tech play which is beginning to reap the benefits of digital investments made 3-4 years ago and is ahead of its regional peers on digital transformation efforts. However, we trim our FY18F/19F earnings by 5%/10% mainly on the back of a potential drop in contribution from Telkomsel which might lead to sluggish 4Q18F and 1Q19F results. 
  • Excluding the market cap of its associates, Singtel’s core business is trading at only 5.7x FY19F EV/EBITDA at ~20-30% discount to its regional and local peers. 


Where we differ: Digital businesses should not be valued like a telco business.

  • Due to EBITDA losses incurred in the Digital Life! and cyber security businesses, the market ascribes a negative value to them. 
  • We argue that these businesses are worth S$0.14 per share based on ~1x revenue multiple as scale is the key for such businesses and Singtel has already shown the capability to turn around a loss-making digital advertising business into positive EBITDA territory. 


Potential catalysts: Final DPS of 10.7 Scts and sequential earnings growth from 2Q19F onwards.

  • Singtel has a track record of maintaining final DPS at 10.7 Scts, ex-dividend in early August. 
  • Earnings to grow from 2Q19 onwards due to recovery of Telkomsel and resumption of National Broadband Network (NBN) migration fee in Australia. 


Valuation: 

  • We use a sum-of-the-parts (SOTP) valuation for Singtel to derive a target price of S$3.85 with a key change being sharply lower valuation accounting for ~20% of our Singtel’s valuation versus ~30% earlier. 


Key Risks to Our View: 

  • Bear-case Target Price of S$3.20 if core and associates disappoint. If core EBITDA were to decline 3% annually over FY18-20F due to new mobile entrants (base case of 3% CAGR) and if Bharti’s and Telkomsel’s market value were to drop 20% each, our fair value could decline to S$3.20. 



WHAT’S NEW - Telkomsel weakness


We trim Singtel’s FY18F/19F earnings by 5%/10%.

  • This is mainly on the back of a potential drop in contribution from Telkomsel leading to potentially weak 4Q18F and 1Q19F results. Telkomsel has contributed ~30% of Singtel’s post-tax earnings so far this year. The Indonesian telecom sector is suffering due to mandatory SIM registration exercise and huge cannibalisation of voice and SMS revenue by cheap data.
  • Telkomsel’s 1Q18 earnings (4Q18F for Singtel) were 15% below our expectations as mobile revenue fell ~2% y-o-y versus expectations of 2-3% growth. There are signs of improved competition after the SIM card registration cut-off date of 1 May 2018 as smaller players cannot continue to sell cheap SIM cards. This will be positive for Telkomsel in the longer term.
  • However, the damage has been done and industry repair will take some time. We have cut our FY19F/20F earnings for Telkomsel by 20%/27% on the back of slower industry revenue growth assumption.

Core operating profit and associate contribution to hurt 4Q18F results to be reported on 17 May.

  • Potential 6% drop in EBIT sequentially due to an absence of ~A$70m of NBN migration fee in 4Q18F which was temporarily halted in November 2017. 
  • Potential 9% drop in pre-tax associate contribution with Telkomsel's contribution falling to ~S$300m in 4Q18F versus S$330m in 3Q18 and Bharti's contribution falling to S$8m versus S$38m in 3Q18 offset partially by rise in contribution from Advance Info Service (AIS) Thailand.


Digital businesses should be valued separately on different metrics.

  • Due to EBITDA losses incurred in the Digital Life! and cyber security businesses, the market ascribes a negative value to them. We argue that these businesses are worth S$0.14 per share based on ~1x revenue multiple as scale is the key for such businesses and Singtel has already shown its capabilities by turning around a loss-making digital advertising business into positive EBITDA territory.

Digital Life is worth S$1.3bn.

  • We have valued Singtel’s Digital Life business at S$1.3bn using a mix of Singtel’s adtech acquisition prices and EV/Revenue multiples of recent industry acquisitions. To be conservative, we have used a 25% discount to account for any valuation premium for Singtel’s ad tech acquisition prices. 
  • Similarly, we apply a 25% discount to EV/revenue multiple of 1.31x for recent industry acquisitions in order to be conservative. Using the average value of the two methods, we have arrived at an enterprise value of S$1.3bn for Singtel’s Digital Life business.

Singtel cybersecurity business is worth ~S$1bn.

  • We have valued Singtel’s cybersecurity business at S$948m using a mix of Trustwave acquisition price and Industry EV/Revenue multiples. To be conservative, we have used a 25% discount to account for any valuation premium for Trustwave’s acquisition price. 
  • Similarly, we have used a 10% liquidity discount on the industry EV/revenue multiple of 2.51x to be conservative. Using the average value of the two methods, we have arrived at an enterprise value of S$948m for Singtel’s cybersecurity business.

Final DPS of 10.7 Scts is a potential catalyst.


Sequential earnings growth from 2Q19F onwards could be another catalyst.

  • Earnings are likely to grow from 2Q19 onwards due to recovery of Telkomsel and resumption of National Broadband Network (NBN) migration fee in Australia. Telkomsel is expected to stage a comeback in earnings as competition improves after the SIM card registration cut-off date of 1 May 2018. 
  • Besides, Singtel could also benefit from resumption of NBN migration fee of A$60-70m each quarter in Australia which was stopped by the regulator in November 2017 due to the technical issues but is expected to resume between June and August 2018.


Core business trading at 20-30% valuation discount versus local peers is hard to justify.

  • The market is attaching a significant valuation discount to the core plus digital business of Singtel, possibly over concerns on the magnitude of losses in the digital segment in the past. This has resulted in Singtel’s core plus digital businesses trading at only 5.7x FY19F EV/EBITDA versus ~7x for M1 and ~9x for StarHub, despite having a much more resilient business model.





Sachin MITTAL DBS Vickers | https://www.dbsvickers.com/ 2018-05-07
SGX Stock Analyst Report BUY Maintain BUY 3.85 Down 4.300



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