SINGTEL (SGX:Z74)
SingTel - Turnaround In Associates
- We expect a turnaround in associates largely driven by recovery in Telkomsel.
- TPG Telecom is unlikely to pose a serious threat to the incumbents.
- SingTel's Enterprise business will benefit from resumption of smart nation initiatives.
- We initiate coverage on Singtel with a BUY rating and a target price of S$3.40.
Company Background
- SINGTEL (SGX:Z74) is the largest mobile network operator in Singapore and is a leading telecommunications company in the region.
- SingTel provide a diverse range of services including fixed, mobile, internet, television, info-communications technology and digital solutions. The group structure consists of Consumer, Group Enterprise and Group Digital Life. Optus a subsidiary of Singtel is the 2nd largest telecommunications company in Australia. Singtel is also invested in leading companies in the region such as Bharti Airtel (India, South Asia & Africa), Telkomsel (Indonesia), Globe Telecom (Philippines) and Advanced Info Service (Thailand).
Investment Merits
- We expect a turnaround in associates. In our opinion, the weakness in Singtel’s associates is coming to an end. The recovery is mainly driven by the improving operating conditions of Telkomsel which represents ~57% of associate earnings. We note that Airtel will still experience near-term weakness due to stiff competition from Reliance Jio. However, we expect the industry to rationalise in the medium term as the industry is facing losses. Furthermore, the industry has massively consolidated from 10 to 4 existing operators. Another tailwind for the sector will be a recovery in emerging market currencies as the interest rate hiking cycle from the U.S. is slowing down.
- Enterprise business will benefit from the resumption of smart nation projects. Management is keeping their guidance for ICT revenue to increase by mid-single digit. This could only mean recovery after the resumption of smart nation projects. The enterprise segment is benefitting from the resumption of smart nation projects as well as growth in small & medium enterprise (SME), hospitality and financial services. The demand for connectivity, data centre and cloud, managed security and network services is driving this growth. We believe Singtel is well positioned to take advantage of this growth.
- TPG Telecom is unlikely to pose a serious threat. TPG Telecom (TPG) announced CAPEX of S$200-300mn for the mobile network rollout and have thus far spent less than S$100mn. The low level of CAPEX should prevent consumers from being too eager to switch to the new player in town due to network reliability, coverage and quality issues. In addition, the price sensitive market where TPG is likely to compete in is filled with MVNOs with far superior network than TPG. TPG is giving free trials for the first 20,000 customers that register their interest with them. The 20,000 only represent 0.38% of total post-paid customers and even less significant on revenue as these customers are in the price-sensitive space. This has led us to believe TPG’s entrance is unlikely to pose a serious threat to the incumbents.
Group Consumer
- Group consumer comprises the consumer businesses across Singapore and Optus (Australia), as well as the group’s investments, mainly, AIS and Intouch (Thailand), Bharti Airtel (India, Africa and Sri - Lanka), Globe (Philippines), and Telkomsel (Indonesia). It focuses on a range of services from mobile, pay-tv, fixed broadband, voice and equipment sales.
- The Singapore mobile market has been under pressure since the pending entrance of TPG. ARPU have corrected in anticipation of TPG. Management has guided Singapore mobile service revenue to decline by mid-single digit. We view that the impact on TPG’s entrance is overdone because TPG announced CAPEX of S$200-300m for the mobile network rollout and have thus far spent less than S$100mn. This has led us to believe TPG’s entrance is unlikely to pose a serious threat to Singtel. The low level of CAPEX should prevent consumers from being too eager to switch to the new player in town due to network reliability, coverage and quality. In addition, TPG Singapore will have less firing power after the merger of TPG Australia and VHA as the entities will have separate balance sheets.
- Structurally we see a shift in the mobile business as smart phone replacement cycles increase this has led to higher adoption of SIM-Only plans which are lower ARPU in nature. The entrance of MVNOs in the market has also weakened ARPU figures as the MVNOs compete in the price-sensitive space in the market giving higher data allowance to consumers. (See sector report for a detailed explanation on SIM-only plans & MVNOs)
Pay-TV Segment
- The pay-tv market in Singapore is operating under challenging conditions. Subscribers are turning to cheaper Over-The-Top (OTT) players such as Netflix, Amazon video and Hulu Plus. OTT players have been disrupting the pay-tv business since early 2016 changing the way people consume content with videos on demand at a lower price. As a result, Singtel subscribers contracted 39K (9%) since 2016.
- We expect the pay-tv market to further contract by ~7% in FY19. The pay-tv business model is under pressure from declining ARPU and declining subscribers, whilst content-cost is fixed. Singtel is internally reviewing and phasing out unpopular content. This should help better manage costs and help alleviate margin pressures.
Optus
- In Australia, TPG and Vodafone Hutchinson (VHA) are in talks for a proposed merger. The merged group pro forma enterprise value will add up to AU$15bn. The combined group will command a market share of approximately 22% in the fixed-line broadband segment and ~ 20% in the mobile segment. This allows the group to be a more effective competitor to challenge the major incumbents Optus and Telstra. The Singapore mobile business of TPG will be separated before the proposed merger by way of an in-specie distribution of shares to existing TPG shareholders.
- Optus currently contribute approximately 50% of group revenue. The consolidation in Australia means less competitive pricing in the market as a result this should benefit the sector as a whole when ARPU rationalises. The merger will exclude VHA from TPG’s mobile business in Singapore as a result TPG will not have access to VHA balance sheet for extra firepower in Singapore. However, TPG gained significant cost savings from the synergies of the merger as it can now tap onto VHA mobile network infrastructure without spending the AU$600m slated for the mobile network rollout initially planned.
- The Australian market is not spared to the adoption of SIM-Only plans. SIM-Only plans attributed approximately 25% of post-paid plans in Optus. We have since observed dilution in ARPU since FY17. However, Optus post-paid subscriber is growing at 7% y-o-y in 2Q19 offsetting the declines in ARPU. We believe ARPU will stabilize as there is less competition in the market with the proposed merger.
Associates
- SingTel’s associates represent ~ 38% of earnings. We think that associates will turnaround mainly driven by the recovery of Telkomsel (~57% of associate earnings).
Telkomsel (Indonesia) – 35% Stake
- Telkomsel (TSEL) is the largest wireless carrier in Indonesia with 167mn customers.
Bharti Airtel (India) – 40% Stake
- Bharti Airtel (Airtel) is an Indian global telecommunications services company based in New Dehli, India.
Advanced Info Service (Thailand) – 23% Stake
- Advanced Info Service (AIS) is Thailand’s largest mobile operator with 40mn subscribers; Thailand has a population of 69mn.
Globe Telecom (Philippines) – 47% Stake
- Globe is one of the largest mobile, fixed line, and broadband player in the Philippines.
Singapore Post – 22% Stake
- Singpost provides logistics services in the domestic market. It provides global delivery services products includes postal, agency and financial services. These services are delivered through its post offices, Self-service Automated Machines (SAMs) and its internet portal.
Group Enterprise
- Group enterprise comprises the business groups across Singapore, Australia, USA and Europe. Services include mobile, equipment sales, fixed voice, data, managed services, cloud computing, cyber security, IT services and consulting.
Singapore
- The enterprise business is benefitting from the resumption of smart nation projects as well as growth in small & medium enterprise (SME), hospitality and financial services. The demand for connectivity, data centre and cloud, managed security and network services is driving this growth.
- Trustwave Holdings is Singtel’s subsidiary that provides cyber-security services.
- NCS Pte Ltd (NCS) is Singtel’s subsidiary and is a regional ICT solutions provider with 18 offices across 10 countries.
- We note that ICT sales are lumpy in nature due to the large contract sizes. We observed declines in traditional legacy services such as voices. Trustwave Holdings was impacted by decline in traditional license maintenance and commodisation of the payment card industry (PCI) data security business resulting in lower sales in the United States.
Group Digital Life
- Group Digital life focuses on three key businesses, digital marketing (Amobee), regional premium OTT video (HOOQ) and advanced analytics and intelligence capabilities (DataSpark).
Amobee
- Amobee focuses on digital marketing. The Amobee platform is an Omni-channel interface that allows automated planning and buying across TV, digital and social in a unified manner. The platform is equipped with AI and algorithms, data analytic tools, and real time reports to help understand and optimally influence consumer’s decision journey across any screens.
HOOQ
- HOOQ is Asia’s first premium video on demand streaming service. It is a joint venture of Sony Pictures Entertainment, Warner Media and Singtel. HOOQ offers access to more than 35,000 hours of Hollywood and local content to customers across Indonesia, India, the Philippines, Thailand and Singapore.
DataSpark
- Data Spark is a mobility intelligence company that aspires to deliver mobility intelligence in every application for every interaction. DataSpark uses analytical tools and give insights into where, when, why, and how people move to help business make smarter decisions.
Valuation
- We initiate coverage on SingTel with a BUY rating and a target price of S$3.40. Our target price is based on FY19e 7X EV/EBITDA of its Singapore and Australia business and the valuation of its associates.
- We gave a 20% discount to Singtel’s regional peers as we take conservative approach in Singtel’s valuation.
Alvin Chia
Phillip Securities Research
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https://www.stocksbnb.com/
2019-01-04
SGX Stock
Analyst Report
3.40
SAME
3.40
