SingTel - RHB Invest 2018-08-09: Marred By Associates

SINGTEL SGX:Z74

SingTel - Marred By Associates

Maintain BUY with lower SOP-based Target Price of SGD3.70 from SGD3.90, offering 16% upside.
SingTel’s 1QFY19 core earnings missed expectations, at 19-20% of our and consensus estimates, on weaker regional currencies, protracted weakness at its associates (specifically Telkomsel and Airtel), and enterprise margin dilution.
While management has retained its earlier guidance, we take the opportunity to trim our FY19-21 core earnings forecasts by 7-9%.
Valuation wise, the stock trades at 12.4x FY20F EV/EBIDA, or at a discount to its historical mean of 13.5x, backed by prospective dividend yields of over 5%. Singtel remains our preferred exposure to Singapore telcos, given its diversified exposure and sustainable dividends.

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SingTel’s 1QFY19 core earnings fell 11% q-o-q (-19% y-o-y) to SGD733m, which made up 20% of RHB and 19% of consensus estimates. The key drags were:
1. 20% q-o-q (-43% y-o-y) decline in associate contributions;
2. Weaker core regional currencies (down 3-10% q-o-q vs. SGD);
3. Further dilution in enterprise margin;
4. Weaker digital revenue from delayed marketing spend by certain Amobee customers. This was notwithstanding a stronger Optus (in AUD terms) and fairly resilient domestic business.
Group revenue eased 3% q-o-q due to the high base of ICT spending in the preceding quarter, and the stronger SGD.

Singapore mobile revenue improved 3% q-o-q from seasonally higher roaming revenue and improved data usage. It was down 4% y-o-y from extended usage weakness and over-the-top (OTT) substitution.
Singtel added 16,000 postpaid subs in 1QFY19, mainly from SIM-only plans (single digit percentage of overall base) and shared plans. This was behind M1’s +34,000 and but ahead of StarHub’s +11,000 for the quarter. Prepaid ARPU held steady at SGD18.
Management said the response to its handset leasing plans for SIM-only customers have been encouraging, and it has witnessed a shift from prepaid to postpaid following the rollout of a subscription-free postpaid plan by a mobile virtual network operator (MVNO).

Mobile service revenue grew 0.4% q-o-q and 2% y-o-y (in AUD terms) on stronger postpaid additions, partially offset by lower APRU from stronger take-up of SIM-only plans and data price competition.
Management said competition from TPG Telecom (TPG) and the MVNOs are confined to SIM-only plans and the more price-sensitive segment of the market.

Group enterprise revenue and EBITDA fell 3.2% q-o-q and 7% q-o-q on lumpy project billings and continued decline in margins from the change in revenue mix, and investments in strengthening digital capabilities. Cyber-security revenue (Trustwave) was hit by lower sales in the US with the commoditisation of the traditional payment card industry and price competition.
Group enterprise EBITDA margin fell to 29.5% in 1QFY19 from 30.7% in the previous corresponding quarter.

Aggressive prepaid registration-led price competition impacted Telkomsel while Reliance Jio (RJIO)’s pursuit for market share and lower mobile termination rates saw Airtel’s ARPU fall by a sharp 25% y-o-y.
Contributions from NetLink Trust (SGX:CJLU) also fell 72% y-o-y following the earlier stake sale. Management believes the worst of the competition in Indonesia is behind them (ongoing re-pricing of data in the market) but competitive pressure will persist in India.

Management has maintained its prior guidance. We trim our FY19F-21F core earnings by 7-9% post the results call. The adjustments were mainly to reflect weaker associate contributions for Airtel and Telkomsel, and lower margin assumptions for the enterprise business.
Key downside risks are competition and forex.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-09

SGX Stock Analyst Report BUY Maintain BUY 3.70 Down 3.900