SingTel - DBS Research 2019-04-08: Accumulate For FY20F Recovery; 5.7% Yield To Compensate For The Wait

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

SingTel - Accumulate For FY20F Recovery; 5.7% Yield To Compensate For The Wait

  • Regional associates’ earnings to grow after two years of decline, led by potential reduction in losses at Bharti.
  • Unsustainable holding company discount of 32% (vs. 12% historically) attaches zero value to Bharti Airtel’s stake worth S$11bn.
  • Maintain BUY with a revised Target Price of S$3.55.

Singtel looks interesting on the back of regional associates.

  • After two successive years of earnings decline, regional associates earnings (critical success factor for Singtel’s share price) are likely to start growing in FY20F, led by potential reduction of losses at Bharti; Bharti’s stock price has surged ~15% over the last 1-month.
  • Meanwhile, SingTel (SGX:Z74) offers an assured DPS of 17.5 Scts (5.7% yield) compensating for the wait.
  • In terms of valuation, SingTel is trading at a 32% holding company discount (vs 12% historically) which ironically attaches zero value to Bharti’s stake worth S$11bn.

Where We Differ: Our FY20F earnings are 6% below consensus.

  • We project 0.3% y-o-y decline in FY20F core EBITDA versus consensus projecting a 2% rise. We model S$88m (-4.2% y-o-y) drop in Singapore EBITDA due to a weak enterprise segment (slow order flow from Smart Nation projects and declines in legacy carriage revenue) coupled with woes in Singapore mobile segment. This should be largely offset by S$75m growth in Optus’ EBITDA, supported by
    1. ~A$50m rise in National Broadband Network (NBN) migration fee in FY20F (vs ~A$50m drop in FY19F)
    2. less volatile AUD/SGD (vs 6% drop in FY19F)

Potential Catalysts: Airtel Africa IPO, tariff-hike in India, monetization of digital business.

  • The public listing of Airtel Africa in June-July 2019 could allow SingTel to monetise its stake in Airtel Africa. Any upliftment of tariffs in India by Reliance Jio (our base case is for stable tariffs), or a partial exit from its digital businesses (worth ~S$2bn) are key catalysts.


  • Maintain BUY with a revised Target Price of S$3.55.
  • We increase our Sum-Of-The-Parts (SOTP) valuation to S$3.55 from S$3.50 as we factor in improvement in the valuations of regional associates which offset our 1% cut to FY20F EBITDA.

Key Risks to Our View:

  • Bear-case valuation of S$2.70 suggests ~7% downside risk. This scenario assumes an absence of EBITDA growth at Bharti in FY20F and further weakness in the core EBITDA.

WHAT’S NEW - What’s in store for Singtel over FY20F?

Associate contributions to rebound stronger in FY20F with the dilution of ownership in Bharti Airtel

  • SingTell’s stake in Bharti Airtel to be diluted after the rights issue. In March, Bharti Airtel proposed a rights issue to raise INR 250bn (~US$3.65bn) expected to be completed by the second quarter of 2019. SingTel announced that it would invest ~S$711m (~US$525m), representing SingTel’s direct interest of 15% in Bharti Airtel. Singapore government’s investment arm, GIC, stepped in to invest US$700m to acquire ~20% of total rights issue, representing rights attributable to SingTel’s indirect interest in Bharti Airtel.
  • Assuming full subscription of shares of the rights issue, SingTel’s stake in Bharti Airtel would be diluted by ~4.3% to 35.2% from 39.5% currently, after the surrender of rights to GIC.

Bharti poised to enter EBITDA growth territory in FY20F and expect earnings to turn positive in FY21F.

  • Since Reliance Jio’s commercial launch in September 2016, industry revenue has dropped over 30% with industry participants now reduced to three major players – Vodafone-Idea, Bharti and Jio. Cheaper data tariffs offered by Jio along with voice cannibalisation by data has resulted in a steep decline in operating profits for the incumbent.
  • Bharti Airtel, the largest operator in India by market share, witnessed its revenues decline by nearly US$1.9bn (~INR129bn) over FY16-18 with Jio dragging down voice and data tariffs to unsustainably low levels of ~US$1.3-1.4, one of the lowest globally.
  • Competitive conditions have now somewhat stabilised with no more tariff cuts from Jio over the last 12 months. We expect Jio to continue with its low tariff strategy for another 6-9 months to poach subscribers as a result of weakness of Vodafone-Idea struggling with integration issues. Fitch expects Jio to acquire ~30% market share over 2019, at which point the telco is expected to raise tariffs by 3-5% and phase out aggressive bonuses in a bid to boost returns over its US$40bn investment in its greenfield mobile network.
  • Bharti Airtel has managed to stabilise the decline in revenues and EBITDA over the recent quarters, and has shifted its focus on to building a high-quality subscriber base as opposed to aggressive subscriber acquisition. Bharti Airtel is also aggressively expanding its 4G network, which we believe should place the telco on an even stronger footing to compete with Jio.
  • We expect conditions in the Indian mobile market to improve over 2020, supported by potential tariff hikes by Jio. Strong performance of Airtel Africa should further buttress EBITDA and earnings stabilisation, in our view.
  • Overall, we expect Bharti Airtel’s FY20F/21F EBITDA to see 13%/20% growth on the back of revenue stabilisation in India and growth in Africa. However, rising depreciation and amortisation arising from the ongoing expansion of Airtel’s 4G network may still lead to continued losses at Airtel over FY20F before a significant improvement in the bottom line is realised over FY21F.

Bharti’s revenue is growing again while EBITDA finally stabilised in 3Q19

Fund-raising exercises to lower losses of Bharti Airtel even further.

  • On top of the INR250bn funds to be raised through the rights issue, Bharti Airtel also announced plans to raise INR7bn through a perpetual bond offering. This is in addition to the planned IPO of Airtel Africa, scheduled to take place over June or July 2019.
  • We believe the bulk of the proceeds raised through these exercises would be utilised to settle Bharti’s mounting debt and to fund ongoing 4G expansions, with any remainder utilised to pursue attractive M&A opportunities.
  • Assuming Airtel uses ~50% of the proceeds from the rights issue to settle its outstanding debt at an average effective interest cost of ~9%, we estimate that Airtel could spare ~INR11bn in interest expenses per year (~INR8bn net of taxes), representing ~14-15% of Airtel’s net finance costs. This should provide Airtel with some relief to par expected losses for FY20 (March YE), in our view.

Dilution of stake and lower losses of Airtel could help Singtel bounce back stronger over FY20F.

  • We revise our expectations on contributions from Bharti in light of the dilution of SingTel’s stake and prospects for lower losses following the rights issue. We expect SingTel to record a pre-tax loss of S$103m from Bharti over FY20F vs. S$164m before, along with a higher profit contribution of S$166m over FY21F vs. S$60m before. We believe this should allow SingTel to expand its associate contributions by 14% y-o-y over FY20F, vs. a projected decline of ~30% over FY19F.

Contributions from Telkomsel to expand ~7% over FY20F.

  • Contributions from Telkomsel, the largest associate of SingTel which accounts for ~30% to SingTel’s bottom line, dipped S$193m over 9M18 (-23% vs. 9M17) on a post-tax basis, largely owing to difficult market conditions in Indonesia over the first half of 2018. Telkomsel’s revenue growth entered negative territory on a y-o-y basis for the first time in recent history in 1H18, driven by subscriber losses and intense competition during the prepaid SIM registration period.
  • Competitive conditions cooled down in the post-SIM registration era after 1H18, with Telkomsel instituting several re-pricing adjustments to uplift woefully low data yields in the country. Contributions from Telkomsel have since expanded, growing 22%/5% q-o-q over 2Q/3Q19.
  • We believe contributions from Telkomsel would expand ~7%/6% over FY20/21F, adding S$80/69m to SingTel’s pre-tax earnings, supported by ~7-8% growth in Telkomsel’s top line. Telkomsel is likely to see ~12% revenue growth in Java (~40% of Telkomsel’s top line) vs. ~5-6% growth outside Java (~60% of Telkomsel’s top line), as Telkomsel remains vulnerable to losing revenue market share to major operators outside Java which continue to bridge the network gap with Telkomsel, challenging the high pricing premiums commanded by Telkomsel in the region.

Associate contributions to rebound over FY20F.

  • We believe SingTel would record ~14% growth in associate contributions over FY20F supported by lower losses from Bharti and growing contributions from Telkomsel adequately offsetting Bharti’s losses. SingTel’s smaller subsidiaries, AIS and Globe should also record low-to-mid single-digit growth in contributions, further supporting the recovery of contributions from associates, which has been a driver of SingTel’s share price in the past.
  • FY21F should ~18% y-o-y growth, with potential positive earnings contributions from Bharti Airtel.

Core EBITDA likely to remain stable supported by Australia

Core businesses in Singapore likely to be weak.

  • Singapore EBITDA declined 7% over 9M19, largely owing to weakness in the Singapore enterprise segment and growing woes in the Singapore mobile market. Temporary suspension of Smart Nation orders with the cyber-security breach on SingHealth in mid-2018 and accelerating declines in legacy carriage business, weighed on the Singapore enterprise business over 9M19 while the Singapore mobile segment also suffered with on-going migration to SIM-Only plans and declining revenues from extra-data usage by subscribers.
  • We expect Singapore EBITDA to remain under pressure over FY20F, with pressure mounting up in both consumer and enterprise segments. Singapore mobile segment, which accounts for ~30% of the Singapore top line, is likely to witness mid-single-digit decline over FY20F, with accelerating migration to SIM-Only plans, price war between the incumbents on the SIM-Only front and the entry of the 4th mobile operator, TPG, in 2Q19. SingTel’s Pay-TV segment is also likely to continue on a downward spiral with ongoing subscriber migration to OTT services.
  • SingTel’s management indicated that Smart Nation orders have resumed over 3Q19 and have picked up pace and that they expect to see a better contribution starting from 4Q19.
  • However, we believe following the breach, the Singapore government would adopt a more cautious approach when expanding Smart Nation projects in the near term. Hence, Singapore enterprise segment would continue to remain under pressure over FY20F, with slower growth in smart nation orders, pricing pressure from STARHUB LTD (SGX:CC3), which continues to expand its cyber-security portfolio aggressively, and continued decline of the legacy carriage business, which is unlikely to be adequately offset by growth in the ICT business.
  • Margins in the Singapore enterprise segment are also likely to remain under pressure with the growing contribution of low-margin ICT businesses (low-mid teen margins). Continued cost savings initiatives should offer some reprieve to Singapore EBITDA which we project would contract ~S$90m over FY20F (-4.2% y-o-y). We expect to see some stabilisation of the Singapore enterprise segment over FY21F, while consumer would continue to remain under pressure. We expect to see ~1% decline (S$24m) in EBITDA from Singapore over FY21F.

Resumption of NBN fees and growth in Optus’s operations to support Core-EBITDA: Further depreciation of the Aussie Dollar remains a concern.

  • Optus’s EBITDA declined 9% over 9M19, largely owing to the lack of NBN migration fees and ~5% depreciation of AUD against SGD over 9M19. Optus reported only A$91m in NBN migration fees over 9M19 vs. A$174m over 9M18, which heavily weighed on Optus’s EBITDA. NBN migrations, which were suspended temporarily in November 2017 due to technical issues, have picked up pace over the recent quarters, with migration fees jumping to A$44m in 3Q19 vs A$23m over 2Q19. We believe migration revenues would continue to accelerate over FY20F, contributing ~A$190m to Optus’ EBITDA in FY20F vs. A$140m over FY19F.
  • Optus should also benefit from benign competition in Australia following the merger of Vodafone and TPG and continued market share gains from Telstra, as Optus rides on its improved 4G coverage to aggressively poach subscribers. The recently launched ”Fixed Wireless Service” should also start contributing to Optus’s revenue and EBITDA over the medium term, although immediate contributions would be marginal.

Base case valuation for SingTel

  • We have valued SingTel’s Singapore and Australia operations at FY20F EV/EBITDA valuations of 7x each while Digital Life! And Cybersecurity businesses (Digital businesses) were valued at an EV/Revenue multiple of ~1x. We trim the valuation of our core businesses to S$1.51 vs. S$1.56 earlier, as we trim our FY20F core EBITDA forecast by 1.1% on weakness in Singapore and slower-than-expected reduction in losses from the Digital Life! Segment.
  • The valuations of regional associates are based on current share prices, while the valuation of Telkomsel is based on a FY19F PE (March YE) of 18x.
  • We project Optus’s EBITDA to expand ~3.8% in AUD terms, and contribute ~S$75m to core EBITDA over FY20F, after factoring in ~1% depreciation of AUD against SGD. However, Optus’s EBITDA growth over FY21F is likely to be lower as NBN migration fees dry out completely by the end of FY21F. We project 1% growth in EBITDA for Optus over FY21F, supported by growth in core operations and improving contributions from Fixed Wireless Services, offsetting ~A$50m lower fees from NBN migration. Further weakening of AUD against the SGD is a key risk to our forecasts.
  • Accordingly, we project -0.3%/0.1% growth in core EBITDA over FY20/21F after factoring in Optus and weak operations in Singapore.
  • See attached PDF report for valuation details. 

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2019-04-08
SGX Stock Analyst Report BUY MAINTAIN BUY 3.55 UP 3.500