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

SingTel - RHB Securities Research 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.
  • Key downside risks are competition and forex.

~ SGinvestors.io ~ Where SG investors share

Results below expectations.

  • 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.

Singtel Singapore.

  • 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).

Optus dials in stronger numbers.

  • 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

  • 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.

Associate contributions impacted by weaker contributions from Telkomsel (-38% y-o-y) and losses at Bharti, partially offset by stronger AIS, Intouch and Globe.

  • 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.

Maintain BUY, SOP-based Target Price adjusted to SGD3.70 from SGD3.90.

  • 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