SingTel - DBS Research 2018-10-24: Rising Associate’s Contribution To Drive The Share Price

SINGTEL (SGX:Z74) | SGinvestors.io SINGTEL (SGX:Z74)

SingTel - Rising Associate’s Contribution To Drive The Share Price

  • Weak TPG capex in Singapore and TPG-Vodafone merger in Australia reduce risk of irrational competition.
  • FY19F/20F EPS cut 5% each in anticipation of potentially weak Bharti; Singtel’s earnings have possibly bottomed out in 1Q19.
  • Maintain BUY with lower Target Price of S$3.64.

Fixed dividend commitment of 17.5 Scts over FY19-20F each

  • Fixed dividend commitment of 17.5 Scts over FY19-20F each (5.5% yield) with 6% EPS CAGR over FY19F-21F.
  • Current quarter associates’ profit contribution has been a critical factor for Singtel’s share price historically. Associates’ profit contribution bottomed out in 1Q19 possibly and is expected to grow in FY20F (after two years of decline) led by Telkomsel, AIS and Globe despite delay in Bharti’s recovery.
  • Besides, core business is likely to be stable too as soon-to-be merger of Vodafone-TPG in Australia and TPG’s abysmally low capex in Singapore (~S$66m so far) have significantly reduced the risk of irrational competition.
  • Singtel is attractive at 12-month forward PER of 16x, -1SD of its 17x historical average and offers 5.5% yield.

Where We Differ:

  • Our revised FY19F/20F EPS is 5% below consensus mainly due to lower projections than consensus for Bharti and Telkomsel,
  • We value Digital Life! and cyber security businesses at 13 Scts per share based on ~1x revenue versus market ascribing them a negative value of 3 Scts per share. Singtel may exit these businesses over the next two years.

Potential Catalysts:

  • Sequential rise in Singtel’s earnings in 2Q19F due to Telkomsel’s recovery, 6.8-Sct DPS in December, Singtel raising its stakes in regional associates.


  • BUY with a revised Target Price of S$3.64.
  • We lower our sum-of-the-parts (SOTP) valuation to S$3.64, due to the decline in the market capitalisation of Bharti and weaker regional currencies partially offset by rise in the value of Telkomsel.

Key Risks to Our View:

  • Bear-case valuation of S$2.70 suggests -9% risk. This assumes
    1. 20% drop in the core valuation due to EBITDA decline vs. stable EBITDA,
    2. 20% drop in Bharti’s, Telkomsel’s valuations and 10% drop in market cap of other associates;
    3. 15% holding company discount vs. 5% base case.

WHAT’S NEW - Key risks minimised in the core markets

TPG’s capex spend too low to pose a threat.

  • TPG has so far spent ~90% of outdoor areas during its FY18 results briefing and mentioned that it is on track to meet the nationwide coverage requirement by December 2018, as set forth by IMDA.
  • TPG is likely to delay the commercial launch of its services to 4Q18 followed by a commercial launch of services in 2Q19.
  • At the current level of capex spend, TPG’s network at commercial launch is unlikely to pose a threat to StarHub, the second largest operator in Singapore, is likely to have spent over S$600m on TPG on its 4G network. We are of the view that to become a disruptive market player in Singapore, TPG would need to significantly ramp up Reliance Jio in India, spent almost ~US$900m after assuming 40% of capex is spent on network maintenance.
  • While TPG is likely to meet the outdoor coverage requirements by 2018, quality of the outdoor network is likely to be poor with low-end subscribers, who already enjoy much better network quality and coverage through Mobile Virtual Network Operators (MVNOs) riding on the incumbent’s mobile networks.

Not meeting coverage requirements could cause penalties or forced industry consolidation.

  • We believe TPG would need to significantly boost its capex spend and network roll-out over 2019, in order to meet IMDA’s road tunnel and in-building coverage requirements by December 2019. TPG would also need to negotiate access to common antenna systems of the incumbents, given the limited availability of space for deploying antennas in key sites.
  • Any potential delays in TPG’s network ramp-up or negotiating access to the incumbents’ networks could lead to TPG failing to meet the coverage deadlines set by IMDA. While this is likely to result in only a fine (S$5,000-50,000) in the first few instances, continued failure to meet coverage requirements, particularly owing to issues in securing funding for capex, could prompt the regulator to mediate a forced consolidation of the industry or push TPG to dispose its spectrum assets to an incumbent.

TPG Merger

Potential merger of TPG and Vodafone heralds a cooler telecom market in Australia.

  • In August 2018, TPG and Vodafone Hutchison Australia announced a merger to establish a full-service telecommunications provider in the country, covering both mobile and fixed-line services in order to better challenge the dominant players, Telstra and Optus. If the merger goes through, 49.9% of the new entity will be owned by TPG shareholders and 50.1% by Vodafone Hutchison Australia shareholders. Following the merger, the group will be listed on the Australian Stock Exchange under the TPG name as Vodafone Hutchison Australia is not publicly listed. TPG also intends to separate its Singapore mobile operations before the implementation of the merger by way of an in-specie distribution.
  • The merger of TPG and Vodafone Hutchison Australia will create a strong third player in Australia with ~20% and ~22% market shares in the mobile and fixed-line industries respectively. Accordingly, this will result in 1.9m fixed-line residential subscribers and 6.0m mobile subscribers, to whom complementary products and complete solutions can be offered.
  • We expect the combined entity to focus on further enhancing profitability rather than engaging in price wars.

TPG unlikely to cause major disruption in Australia.

  • We expect this merger to create better competitive conditions for the top three players as the risk of an alien operator, TPG, disrupting the low-end mobile market through aggressive pricing is now contained. TPG was slated to enter Australia as the fourth mobile network operator, after having acquired spectrum rights in the 700MHz spectrum band. The telco was contemplating aggressive pricing strategies, having announced plans to offer free unlimited mobile data for six months (A$9.99 thereafter).
  • While we had expected to see some disruption in the price-sensitive quarter of the market, we believe such risks have now subsided with TPG’s potential merger with Vodafone.

Funding of Singapore expansions remains a key concern.

  • As part of the merger agreement, TPG Singapore will be spun off as an independent company with cash flow negative till 2022, three years after its commercial launch in 2019.
  • Potential financial strains on TPG’s Singapore operations could force TPG’s Singapore business to an incumbent operator.

Regional Associates

Contributions from Telkomsel likely to return to high single-digit growth in FY20F if the Indonesian Rupiah stabilises.

  • Contributions from Telkomsel dipped 22%/38% over 4Q18/1Q19 as Telkomsel grappled with the depressed data yields of the industry.
  • Contributions from Telkomsel is likely to record mid-to-high double-digit decline in FY19F given weakness in 1H18 and 8.6% YTD depreciation of the Indonesian Rupiah against the Singapore Dollar.
  • We believe contributions from Telkomsel would return to Java in FY20F.

Bharti's earnings recovery pushed back to FY21F from FY20F earlier.

  • 1Q19 marked the second consecutive quarter of negative contributions from Bharti, with Singtel recording a less bullish view.
    • Firstly, we do not see a let-up in competition till June 2018.
    • Secondly, voice and SMS comprise ~70% of ~S$30, continued growth in data should cannibalise Bharti's legacy revenue till data contribute the majority of Bharti’s revenue.
  • The integration of operations of Vodafone and Idea is fraught with Bharti. We expect Jio and Bharti to persist with aggressive pricing to gain subscribers from Vodafone-Idea.
  • We project contributions from Bharti to dip into major earnings recovery until FY21F.

Growing contributions from AIS to offer some respite.

  • Competition in Thailand has veered off the expensive handset subsidy wars seen in the past, in favour of value-added services (e.g. fixed speeds, unlimited data usage) which should benefit DTAC presently uses 10MHz in the 850MHz spectrum band based on a concession agreement with CAT, the only low-band spectrum of the telco. While DTAC is set to win AIS to snatch subscribers.
  • We have projected for contributions from AIS to grow 17%/12% in FY19/20F in view of this.

Consensus earnings for Globe for the current year have been raised 25% with management guidance revised up.

  • Revenue guidance has been revised to mid-single-digit growth from low single digit earlier. EBITDA margin guidance has been raised to mid-40s from 40% earlier owing to lower subsidy and interconnection expenses.
  • Globe is set to benefit from perception of better network quality and its market positioning, appealing to data-hungry millennials. Competition between PLDT and Globe has remained elevated in the mobile market, but the duo has taken a much cooler stance on the growing fixed broadband segment.
  • ~Eight operators have so far expressed an interest in entering Philippines as the third operator. Applications for expressions of interest are set to close on 5 November. We expect to see improving contributions from Globe, given the telco's favourable position and amicable operating conditions in the Philippines.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2018-10-24
SGX Stock Analyst Report BUY MAINTAIN BUY 3.64 DOWN 3.700