SingTel - RHB Invest 2018-12-14: Chugging Along; Still Top Pick

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

SingTel - Chugging Along; Still Top Pick

  • Maintain NEUTRAL based on SOP-derived Target Price of SGD3.22, 5.2% upside.
  • We see earnings headwinds across Singtel’s mobile footprint for 2019, with competition still looking intense. In our view, the underlying growth drivers are: the recovery in enterprise/ICT revenue, better showing from its associates, and further opex savings.
  • We view the risk-reward profile of the stock as largely balanced at current levels. The absolute DPS payout of SGD0.175 provides certainty, with attractive FY19F-21F dividend yields of 5.7%.
  • Singtel remains our preferred sector pick.

Outlook and catalysts

  • We believe catalysts for Singtel’s underlying growth in 2019 are:
    1. A stronger rebound in the enterprise/ICT business with the resumption of smart nation projects;
    2. Greater opex savings;
    3. Earnings recovery at its associates, specifically in Indonesia (Telkomsel) and Thailand (AIS) on data price repair and receding competition.
  • The group is on track to achieve targeted cost savings of SGD500m for FY19 (1HFY19 savings at SGD193m). This should help drive group EBITDA improvement (1HFY19: -6.1% y-o-y) despite the topline pressure (1HFY19: -0.2% y-o-y).
  • Importantly, its mobile advertising arm (Amobee) is also expected to be EBITDA positive in FY19 (1HFY19: -SGD10m EBITDA). We expect Singtel’s core earnings to grow by a CAGR of 3.2% from FY19-21.

Mobile revenue likely to remain subdued, with growth at Optus mostly offset by weaker Singapore operations.

  • Singapore consumer mobile service revenue (MSR) fell for the third consecutive quarter, down 2.3% q-o-q in 2QFY19 (1HFY19: -5%), as strong growth in mobile data revenue was offset by roaming weakness. The impact was magnified by the higher subsidies accorded for premium handsets being netted off from service revenue (as per the new Singapore Financial Reporting Standards 15).
  • In Australia, Optus MSR narrowed 2.1% q-o-q (-2% y-o-y) while consumer EBITDA fell 4% q-o-q in AUD terms, mainly from higher opex. Moving forward, we expect the prospects of the Singapore mobile business to remain challenging, due to steeper competition from the entry of TPG. We see the competitive risks in Australia being confined to the lower ARPU and price–sensitive segment of the market, which is the mainstay of mobile virtual network operators (MVNOs).

Enterprise should make a comeback.

  • Group enterprise revenue and EBITDA fell 4% and 6% in 1HFY19, from the change in revenue mix (lower-margin services) and lumpy sales in the previous year. We see the renewed focus on smart nation projects and investments driving a stronger 2HFY19 and FY20F.

Maintain NEUTRAL.

  • Singtel trades at 11.7x 2019F EV/EBITDA, -1.5SD below its 5-year historical mean. With the over 14.3% share price decline YTD, we view the stock’s risk-to-reward profile as largely balanced, supported by a recurring dividend payout of SGD0.175/share for FY19F/20F. This translates into decent dividend yields of 5.7%.
  • Key risks are stronger-than-expected competition and slower-than-expected earnings recovery at its associates.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-12-14
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 3.220 SAME 3.220