SingTel - UOB Kay Hian 2018-08-10: 1QFY19 Competition Heats Up In Indonesia And India

SINGTEL SGX:Z74

SingTel - 1QFY19 Competition Heats Up In Indonesia And India

Singtel’s 1QFY19 results were below our expectation on increased competition in Indonesia and India.
Telkomsel saw contraction in revenue from voice and SMS while growth in data revenue slowed. Bharti Airtel suffered severe ARPU erosion due to competition from Reliance Jio.
Recovery is in sight as Telkomsel’s pricing has since improved towards late-June after the Lebaran holidays. Bharti Airtel’s revenue has stabilised on a sequential basis.
Maintain BUY with a lower target price of S$4.05.

Singapore Telecommunications (Singtel) reported an underlying net profit of S$733m for 1QFY19, below our forecast of S$794m.

~ SGinvestors.io ~ Where SG investors share

Optus added 31,000 post-paid mobile customers and its post-paid subscriber base expanded 6.7% y-o-y. Post-paid ARPU declined 2.6% y-o-y due to higher mix of SIM-only plans and price competition for data (increase in data allowance). Mobile service revenue increased 5.4% y-o-y. Mass market fixed revenue was flat due to the temporary suspension of migrating customers to the National Broadband Network’s (NBN) hybrid fibre co-axial (HFC) network. EBITDA increased 2.8% y-o-y.
In Singapore, mobile service revenue declined by 3.8% y-o-y due to lower voice usage, including iDD and roaming, caused by voice to data substitution. It added 16,000 post- paid subscribers, mainly SIM-only plans. Post-paid ARPU declined 5.3% y-o-y to S$46. 6% y-o-y with the 2018 FIFA World Cup contributing additional venue of S$15m.
EBITDA declined 2.6% y-o-y.

Group enterprise revenue fell 3.2% due to the completion of large infrastructure projects last year. Revenue from the data and internet segment contracted 3.9% y-o-y due to price competition for traditional carriage services. Revenue from managed and security technology services increased 4% y-o-y to S$97m.
Staff costs decreased 3.9% y-o-y due to reduction in headcount and lower staff incentive accruals.
Group enterprise's EBITDA margin contracted 1.2ppt y-o-y to 29.5%.

Revenue from digital marketing decreased 7.1% y-o-y due to the timing of marketing spend by certain customers. Amobee leverages on Turn’s programmatic platform to double revenue from the agency trading business.
Group digital life incurred a negative EBITDA of S$23m.

Contributions from regional mobile associates declined 42% y-o-y to S$391m. Contributions from AIS, InTouch and Globe Telecom grew 14.1%, 18.5% and 16.8% y-o-y respectively. Unfortunately, Bharti incurred losses of S$63m while contribution from Telkomsel weakened 38% y-o-y to S$237m.
Telkomsel suffered a steep 23% y-o-y decline for voice and SMS revenue and slower growth of 11% y-o-y for data revenue from intense data pricing competition. EBITDA declined 27% due to higher operations and maintenance costs due to accelerated deployment of 4G network.
Contribution from Telkomsel was further hampered by a 9% depreciation of the rupiah against the Singapore dollar.
Contributions from Bharti Airtel were affected by a mandated reduction in mobile termination rates and disruptive price competition from Reliance Jio, which caused mobile ARPU to decline 32% y-o-y to Rs105. It added 40.4m mobile subscribers, including 28m from the acquisition of Telenor India.
Contribution from Bharti Airtel was further hampered by an 8% depreciation of the rupee against the Singapore dollar.

Management guided for low single-digit growth for revenue and a stable EBITDA for FY19. Mobile service revenue should grow by a low single-digit for Australia and decline by mid-single-digit for Singapore.
Dividends from mobile associates are expected to be unchanged at S$1.4b. Cash capex is budgeted to drop S$0.2b to S$2.2b after three years of intense capex for Australia. Free cash flow is expected to improve S$0.1b to S$1.9b for FY19.
Barring unforeseen circumstances, management intends to maintain ordinary dividends at 17.5 S cents for the next two financial years and, thereafter, revert back to paying 60- 75% of underlying net profit.

Singtel focuses on digitalisation and automation to improve customer engagement and deliver productivity gains and cost savings. Management targets cost savings of about S$500m in FY19.
Telkomsel was affected by intense price competition during the mandatory pre-paid SIM cards registration. Pricing has since improved towards late-June after the Lebaran holidays.
Bharti Airtel’s revenue has stabilised on a sequential basis.
It plans to list its African unit, Airtel Africa.

We cut our net profit forecast for FY19 by 13.5% and by 15.1% for FY20 due to reduced contributions from Telkomsel and Bharti Airtel.

Maintain BUY.
Our target price for Singtel has been cut to S$4.05, based on DCF (required rate of return: 6.25% (previous: 6.0%), growth: 1.5%).

Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-08-10

SGX Stock Analyst Report BUY Maintain BUY 4.09 Down 4.220