SingTel - RHB Invest 2018-05-17: EBITDA Headwinds

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SINGTEL SGX: Z74

SingTel - EBITDA Headwinds

• Maintain BUY call, SOP-based Target Price of SGD4.10 (20% upside), and forecasts, pending a results call with management later today.
• FY18 results announced this morning were broadly in line with expectations. EBITDA downside risks are likely to persist on stiff competition across most markets.
• YTD, SingTel's share price has de-rated by 4% (-8% and -9% relative to the STI and FTSE Telecommunications Index (FSTTI) respectively), with forward EV/EBITDA valuations at -2SD of its historical mean.

Results broadly in line.

• SingTel's FY18 (Mar) core earnings of SGD3.54bn (-8.4% y-o-y) formed 96% of consensus forecast and 94% of our estimate. Group revenue expanded 5% y-o-y on stronger Optus revenue, stable enterprise business, and higher contributions from its digital arm (supported by the acquisition of Turn Inc in Apr 2017), which offset weakness at its Singapore consumer business (-4.4% y-o-y).
• Revenue was down 6% q-o-q on seasonality. Group EBITDA fell 6% y-o-y (-4% y-o-y in constant currency terms) from higher retention costs and competition (-5% q-o-q). Not surprisingly, the key drags were its regional associates, down 27% y-o-y in 4QFY18 (-15% YTD), further weighed down by the slide in the IDR, INR and PHP against the SGD during the quarter.

Dividend payout rises above guidance of 60-75%.

• An expected final DPS of SGD0.107 was declared, which together with the interim DPS of SGD0.068, translates into a payout of 81%, above its regular guidance of 60-75%. Including the special DPS of SGD0.03 from the sale of Netlink Trust (NETLINK SP, NR), total DPS works out to be SGD0.205 or a dividend yield of 5%.
• Management has temporarily recalibrated its dividend guidance for FY19-20, now based on absolute payouts of SGD0.175, with the regular payout guidance (based on underlying earnings) to resume in FY21. This should assuage investor concerns on the sustainability of payouts, in our view.

Singapore business continues to be hit by stiff mobile competition.

• The decline in consumer mobile revenue accelerated to -6% y-o-y in 4QFY18, from -3.4% in the preceding quarter (-4.7% q-o-q), as lower usage/roaming revenue and higher take-up of SIM-only plans offset data growth. 
• Despite the seasonally weaker quarter for handsets, EBITDA declined by a steep 15% y-o-y due to aggressive re-contracting activities, especially on higher value customers with subscriber acquisition cost (SAC) up 22% y-o-y. Consequently, EBITDA margin narrowed 3ppts y-o-y to 29.1%.

Enterprise margins continue to slide.

• Group enterprise revenue was steady YTD but EBITDA fell for the third consecutive quarter, on lower margin business and price pressure from traditional products.

Optus.

• While overall revenue improved 3% y-o-y (in AUD terms), EBITDA fell 5% y-o-y in 4QFY18, from the absence of national broadband network (NBN) migration grants, which affected fixed revenue. 
• Mobile service revenue was stable y-o-y and narrowed 2% q-o-q on lower ARPU from higher SIM-only plans and competition. 
• Optus’ 4G mobile coverage inched higher to 96.9% (3QFY18: 96.3%) with 6,783 4G sites, of which 86% are on the superior 700MHz band.

Digital life services saw reduced EBITDA losses, with Amobee group turning EBITDA positive.

• One-off content cost credits and government grants resulted in the digital arm hitting EBITDA breakeven for the quarter. Overall EBITDA losses of SGD51m YTD tracked ahead of its earlier guidance of sub-SGD100m losses. 
• Revenue more than doubled y-o-y to SGD1.08bn, helped by the acquisition of Turn in Apr 2017, and robust growth in the digital advertising business (Amobee group), which surged 59% y-o-y in 4QFY18 and 103% YTD.

Associate contributions hit by competition in Indonesia and India.

• Regional associate contributions fell for the third consecutive quarter, with the key drags being Telkomsel and Airtel. This was partly mitigated by AIS. 
• In Indonesia, fervent price competition (against the backdrop of heightened channel activities ahead of the prepaid registration deadline) led to the 8% q-o-q decline (-2% y-o-y) in Telkomsel’s revenue – the first contraction since 4Q10 – while EBITDA fell for the third consecutive quarter. 
• Competition remains intense in India, further exacerbated by the cut in international mobile termination rates from Feb 2018.

Singapore Research RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-17

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