SingTel - UOB Kay Hian 2019-03-21: Stock Trades Below Mean & Offers Diversification Across The Region

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

SingTel - Stock Trades Below Mean And Offers Diversification Across The Region

  • SingTel (SGX:Z74) will focus on mitigating declining legacy voice revenue by monetising data growth opportunities while keeping a lean cost structure. The ICT and digital businesses will be drivers for the company, albeit accounting for only 21% of group revenue.
  • The subscription of Airtel rights issue will not derail SingTel from its mandate to pay out dividends of 17.5 S cents per year for FY19 and FY20.
  • Maintain BUY as the stock trades below mean EV/EBITDA with a 5.8% dividend yield. Target price: S$3.58.



WHAT’S NEW


Focusing on customer-centric offerings amid market competition...

  • On average, SingTel experienced a 2% y-o-y decline in traditional carriage revenue (group consumer and enterprises, excluding ICT) over FY14-18. This was due to intense competition in Singapore and Australia where SingTel has been mitigating the decline in voice revenue by monetising data growth opportunities. Data accounted for 62% and 79% of Singapore and Australia consumer revenue respectively.
  • Stepping into 2019, we expect consumer revenue to continue contracting by mid-single digit on the back of lower roaming revenue and shift towards SIM-only plans.

...while diversifying away into digital businesses and ICT services.

  • As SingTel diversifies into digital businesses, the traditional carriage revenue has fallen from 86% in FY14 to 76% in FY18.
  • Positively, SingTel’s digital businesses and ICT services have grown rapidly, registering a 3-year revenue CAGR of 61% and 8% respectively. The growth is driven by cyber security services, smart nation prospects and cloud services.

Keeping a lean cost structure.

  • Cost rationalisation exercise for SingTel will continue into 2019 as the company renegotaties lump sum contracts. In addition, digitisation of the core business will also help to keep a lean talent force, especially for Optus.

Full launch of TPG services by 2Q19, at best.

  • We understand that TPG has achieved outdoor coverage of 95% (adhering to regulatory targets) and will aim to achieve in-building coverage targets by end-20. We understand TPG has delayed full commercial service to 2H19 and the rollouts have been slow. Thus, we take the view that competition would intensify by end-19 and have conservatively pencilled in a sharp 30% post-paid ARPU contraction over 2019-21.
  • We believe SingTel is better positioned to weather the competition given its well diversified portfolio of investments. Mobile business in Singapore accounts for only 7% of group revenue if we include its proportionate share of its associates’ revenue.


STOCK IMPACT


Airtel’s recapitalisation exercise introduces GIC as a strategic shareholder.

  • Airtel proposed to raise up to US$4.5b from rights issue and perpetual bonds to reduce existing debt. Assuming SingTel subscribes to its full allocation of US$525m in rights shares, the group remains the largest shareholder at 35.2% (from existing stake of 39.5%).
  • Importantly, the equity dilution will pave the way for GIC to be a strategic shareholder in Airtel. This move is to boost public confidence in the future prospects of Airtel in India.

India: Market to consolidate and ARPUs to stabilise.

  • We expect to see market consolidation bring about some stabilisation in overall ARPU in India (experienced its first ARPU uplift in 3QFY19, after seven quarters of ARPU decline).
  • The recapitalisation exercise by Airtel will help Bharti India maintain its network leadership position while the company is currently working in partnership with 13 manufacturers to improve device affordability across India.

Gearing position remains healthy…

  • On a pro forma basis (assuming SingTel subscribes to Airtel’s rights issue amounting to US$525m), group net debt-to-EBITDA rises to 1.69x (from 1.58x as at Dec 18). The gearing level remains acceptable to maintain strong credit ratings and ensures that the group can pay out 17.5 S cents of new dividends per year over FY19-20.

… as management maintains a 17.5-cent dividend payout for FY19-20.

  • 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.


EARNINGS REVISION/RISK

  • No change to earnings estimates.

Guidance for FY19.

  • For FY19, management is maintaining its guidance for low single-digit growth for revenue but a low single-digit decline in EBITDA. Mobile service revenue should be stable for Australia and decline by mid single-digit for Singapore. Dividends from its regional mobile associates are expected to be unchanged at S$1.4b.
  • Management has lowered its guidance for cyber security and Amobee. Cyber security revenue is expected to increase by high single-digit while Amobee revenue is now expected to come in at low teens.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$3.58, based on DCF (required rate of return: 6.25%, growth: 1%).


SHARE PRICE CATALYST

  • Muted impact from fourth player in Singapore.
  • ARPU stabilisation in Australia.
  • Faster-than-expected revenue growth for digital businesses and ICT.
  • Market consolidation in India.





Chong Lee Len UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-03-21
SGX Stock Analyst Report BUY MAINTAIN BUY 3.580 SAME 3.580



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