SingTel - OCBC Investment 2018-06-20: Embracing A Digital Future

SingTel - OCBC Investment 2018-06-20: Embracing A Digital Future SINGTEL SGX: Z74

SingTel - Embracing A Digital Future

  • Key takeaways from Investor Day 2018. 
  • Clear strategy to compete in core markets. 
  • Digital and enterprise to drive growth ahead.  

Consumer Singapore: Differentiating on service quality

  • Singtel’s core markets (Australia and Singapore) continue to face competitive pressures in the consumer segment with the impending entry of TPG in both markets. That said, Singtel has a clear strategy to maintain its competitiveness in each market.
  • For Singapore, Singtel will continue to differentiate itself by:
    1. investing to maintain superior network quality,
    2. ensuring better customer experience,
    3. offering higher value services, and
    4. offering innovative offerings such as handset leasing plans (to entice the growing SIM-only market) as well as exclusive handset deals (to attract post-paid customers).
  • Singtel is also digitalizing its operations to lower costs and improve customer experience. For example, automating certain transactions such as sales and query handling through online/mobile app platforms allows Singtel to reduce customer service headcount and improve speed of service.

Consumer Australia: Differentiating with exclusive content

  • For Optus in Australia, management expects the initial competition from TPG to be less impactful given that TPG will launch with data-only mobile plans for the start. That said, having seen a strong FY18 (adding 384k customers to its subscriber base), Optus will continue to focus on four key pillars:
    1. lead in customer experience,
    2. lead in mobile networks,
    3. differentiate with premium content offering (e.g. EPL, National Geographic, etc.), and
    4. improve business productivity.
  • In addition, holding the most 5G spectrum relative to its competitors, Optus intends to leverage on this advantage and launch 5G services in 2019, ahead of its peers.

Unchanged Fair Value at S$4.10

  • Across both countries, Singtel/Optus do not intend to compete on pricing, but will let their MVNOs target the price-sensitive consumers. We believe Singtel’s guidance for dividends to be maintained at 17.5 S-cents for FY19 and FY20 signals a stable cash flow outlook despite the competitive pressures.
  • Management targets to keep traditional carriage revenues flat over five years as voice-to-data substitution continues, but aims to grow digital and enterprise revenues as a proportion of consolidated revenues from 24% in FY18 to 50% by FY23. 
  • We maintain our fair value estimate of S$4.10 on Singtel.

Creating a common cross-border payment platform

  • Leveraging on its regional reach (through its interests in its associates) and large subscriber base of more than 700m mobile subscribers, Singtel intends to create a common platform to interconnect e-wallets across the group.
  • At present, Singtel and its associates each have e-wallets in their respective local markets. However, as early as 3Q18, Singtel’s subscribers in Singapore will be able to use their e-wallet in Thailand, while AIS’ (Singtel’s Thai mobile associate) subscribers will be able to do the same in Singapore.
  • The plan is for Singtel to progressively partner with its other mobile associates to offer such interoperable e-wallets within the region. Unlike Singapore and Australia where credit card penetration rates are high, the other markets in this region have higher mobile penetration rates, which Singtel wants to leverage on using its regional reach.

Group Enterprise: ICT and Cyber Security to drive growth

  • In the recent years, Singtel has been focused on driving growth in its ICT-related revenues as core carriage business (mainly voice and roaming related) came under pressure with increasing voice-to-data substitution as well as growing competition. This resulted in a shift in revenue mix towards ICT services, which formed 46% and 25% of Group Enterprise revenue and EBITDA, respectively. Even though ICT-business commands EBITDA margins in the teens while core carriage business generates EBITDA margins in the region of 40%, management noted that ROIC is similar given the lower capex for ICT business.
  • Separately, Singtel will also continue to pursue growth in the cyber security space. Trustwave, which is Singtel’s cyber security arm, is now one of the top five global cyber security players among telcos.
  • Management believes that apart from organic growth, it makes sense to jump on potential M&A opportunities to grow and improve its competitiveness in the highly fragmented industry (biggest player only has 5%-6% market share). The objective is to be a market leader in this industry, and management is already looking at strategic exit options to appropriately unlock the value of Trustwave.
  • All said, noting that being a reseller of services will not be sustainable over the long-run, management believes in the strategy of pursuing and owning intellectual properties as a key differentiator in order to enable growth of its Group Enterprise segment.

Group Digital Life: To unlock value of Amobee within three years

  • Amobee, Singtel’s independent digital marketing arm, turned EBITDA positive for the first time in FY18, having acquired Turn (to complement data management capabilities) on 22 Feb 17.
  • Looking ahead, management noted it needs to reach critical scale in order to achieve sustainable profitability, and is targeting to become EBIT positive in the next one to two years. Eventually, after establishing consistently strong earnings record, management expects Amobee to seek an IPO in the next two to three years.

Telkomsel: Plans to increase pricing

  • The intensifying competitive landscape in Indonesia has led to pressures on revenue as Telkomsel had to cut its data pricing premium (despite superior network quality), in a bid to stay competitive.
  • Post-Ramadan, Telkomsel intends to raise data prices on its regular top-up packages, and reduce data allowances on its starter packs. It will also reduce dealer commissions on starter packs to improve its margins. For now, the situation remains dynamic with management noting that the industry direction on pricing will only become clearer from Jul 18. Nonetheless, the legacy voice and SMS revenues are expected to continue its decline with the increasing usage of data. However, the recently completed pre-paid registration seems to have stabilized churn rate.
  • Looking ahead, Telkomsel will continue to strengthen network quality and maintain its premium market positioning. Separately, Telkomsel is looking to derive cost savings through digitalization of operating processes such as in the area of power management.

AIS: aims to be a major player in the fixed broadband space

  • In addition to having a foot in a growing segment in Thailand, AIS entered the fixed broadband space with a view to defend mobile market share. Management believes it is unlikely to see price war again, especially since it is now clear that all players are able to react promptly to each other. Hence, going forward, AIS will focus on growing its 4G subscriber base by using content offerings as a differentiator.
  • AIS currently has 7% market share in the fixed broadband space in Thailand and intends to reach 20% by 2020. Management expects to cover 6m homepass out of 21.5m households, and expects to turn EBIT positive if able to achieve 800k subscribers.
  • AIS fixed broadband growth strategy will be to increase broadband speed at the same pricing going forward, with the use of fibre technology.

Bharti Airtel: Increasing market share a key focus

  • Management believes that the on-going merger of Vodafone India and Idea presents a once-in-a-lifetime window of opportunity over the next 12-15 months to gain market share. However, having seen consolidation to a now more attractive state of three-player market, management believes it is unlikely to see any increase in pricing during this state of flux until equilibrium is achieved.
  • Looking ahead, Bharti has a five-prong strategy:
    1. gain market share in 4G via programme partnerships as well as migration of its 3G subscribers,
    2. continue to invest in network quality and improve in customer satisfaction through digitalization of core operations,
    3. drive non-wireless revenue growth by capturing opportunities in the SMB space, and stepping up home passes for its fibre broadband network, as well as develop content assets and eventually monetizing them,
    4. engage in more cost savings initiatives such as simplifying internal processes and partnering to build fibre network, and lastly,
    5. retain talent through appropriate KPIs.
  • In addition, Bharti plans to IPO its Africa business early next year to unlock value and manage its balance sheet.

Globe: Talks of third operator still on-going

  • Management attributed market share gains partly due to globe being the preferred brand, with its network carrying more than half of Philippines’ mobile data traffic. While Globe is still one of the only two telcos in Philippines currently, the potential entry of a 3rd operator cannot be ruled out, despite the process being delayed continuously.
  • Looking ahead, data remains a key growth driver, and Globe will continue to partner with key content providers to drive up data consumption.

Eugune Chua CFA OCBC Investment | https://www.iocbc.com/ 2018-06-20
SGX Stock Analyst Report BUY Maintain BUY 4.100 Same 4.100