SingTel - RHB Invest 2018-05-18: Dividend Certainty

SingTel - RHB Invest 2018-05-18: Dividend Certainty SINGTEL SGX: Z74

SingTel - Dividend Certainty

  • Maintain BUY with new SOP-based Target Price of SGD3.90, from SGD4.10, offering 13% upside.
  • While competitive risks remain in Singapore (with the entry of TPG Telecom in 2H18) and across its mobile associates, we see improved risk-reward profile for the stock from a stronger Optus, sustainable dividends, and cost savings/avoidance initiatives totaling SGD500m for FY19.
  • Downside risks are stronger-than-expected competition across markets, and higher-than-expected capex.

We highlight below, key takeaways from the FY18 results call.

ARPU pressure likely to persist.

  • We expect ARPU dilution to persist given the higher take-up of SIM-only plans and weak usage/roaming revenue. Postpaid ARPU fell 5% q-o-q and a bigger 9% y-o-y to SGD61, given SingTel’s larger exposure to roaming revenue (4QFY18: 15% of mobile revenue). 
  • Management highlighted SIM-only plans made up a higher 18% of new and re-contracting subs during the quarter vs 15% in the December quarter.

Optus is not perturbed by the re-surging mobile competition

  • Optus is not perturbed by the re-surging mobile competition in the market, with Telstra (TELS AU) having recently launched Australia’s first unlimited mobile data plan (first 40GB followed by unlimited data at throttled speed of 1.5Mbps). 
  • Management is confident of capturing further market share (especially in regional areas) backed by a premium network and strong content proposition that resonates well with users. 4G population coverage inched higher to 96.9% in 1Q18 from 96.6% in the previous quarter, with the company on track to roll out 5G based on fixed wireless technology in 1Q19. 
  • Optus added 135,000 new subs (including enterprise subs) in the quarter – the second highest quarterly net addition on record.

Dividend recalibration a positive move.

  • We believe the guidance of absolute payout of SGD0.175 DPS for the next two FYs (FY19-20) is assuring, as it provides certainty to investors on the sustainability of the payout, and safeguards against further earnings headwinds from its regional mobile associates. 
  • For FY18, dividend payout of 81% was the highest since FY11. 
  • We also note that capex for FY19 is guided to decline to SGD2.2bn (Optus’ 3-year investment cycle is behind) from SGD2.4bn (FY18) (excluding spectrum payments), coupled with earlier proceeds from the sale of Netlink Trust (NETLINL SP, NR), which provides headroom for potential M&As in the medium term.

Maintain BUY – still our preferred SG telco.

  • We lower our FY19-20 core earnings forecasts by 8-9% after imputing weaker enterprise margins and regional contributions. Our SOP-based Target Price adjusts to SGD3.90 upon rolling our base year forward, and updating the valuations of its listed mobile entities. 
  • We have ascribed lower target EV/EBITDA multiples to value Optus and its domestic business to be conservative due to the sector-wide valuation compression. 
  • YTD, the stock 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.

Singapore Research RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-18
SGX Stock Analyst Report BUY Maintain BUY 3.90 Down 4.100