Singapore Telecommunications Limited - Phillip Securities 2019-05-16: Remain Vested For Yield & Recovery

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

Singapore Telecommunications Limited - Remain Vested For Yield & Recovery

  • SINGTEL (SGX:Z74)'s 4Q19 EBITDA & net profit were within expectations. Full-year net profit was down 44% y-o-y. Excluding one-off gains in FY18 net profit would have been down 14% y-o-y.
  • Associates Airtel continued to drag down earnings, expanding its losses to S$98mn. Telkomsel improved 2% y-o-y with a profit of S$223mn. Globe’s earnings surged 53% y-o-y on the back of higher data revenue and increase demand for internet services.
  • Digital business is gaining traction, revenue spiked 33% y-o-y and accounts for 6% of revenue.
  • We roll over our valuations to FY20e. Maintain ACCUMULATE with a higher Target Price of S$3.31.



The Positives


Going digital to optimise costs further.

  • As part of the cost optimisation strategy, SingTel invested in self-service channels to help reduce customer acquisition costs. An example is the launch of GOMO, a pure digital product with no physical stores and call centre support. We believe GOMO have aided 32k post-paid subscriber growth q-o-q.
  • SingTel have also been rationalising content portfolio, optimising headcount, standardising & simplifying price plans and shutting down legacy networks & systems. This has led to a cost saving of S$541mn in FY19. We believe these cost savings will be reinvested to further optimise SingTel’s operations.
  • We expect a cost saving of S$490mn in FY20e.

Digital business gaining traction.

  • Group Digital Life (GDL) revenue spiked 33% y-o-y and accounts for 5% of total revenue in 4Q19. Growth is mainly attributed to Amobee and its programmatic platform business and also the incorporation of Videology operations.
  • EBITDA loss for Group Digital Life is at S$92mn in FY19. Management guided mid-single digit increase in Amobee’s revenue and improvement in EBITDA in FY20e.


The Negatives


Associates still weak.

  • Airtel losses are at S$98mn. We believe the recent rights issue would strengthen Airtel’s balance sheet to continue its fight against Reliance Jio.
  • Telkomsel profit improved 2% y-o-y, we believe recovery is on track as competition is rationalising after the SIM re-registration episode.
  • Associates weak performance was cushioned by a 53% surge in Globe’s profits. The surge is mainly due to the monetisation of data and increasing demand in internet services.

Erosion of enterprise margins.

  • Group enterprise EBITDA fell 16% y-o-y due to a higher mix of ICT contribution. ICT services typically commands lower margin compared to core carriage services. There are major contracts that are up for renewal with downward price revisions.
  • Over in Australia there was a short term freeze in the government sector due to federal and state elections. These factors led 4Q19 EBITDA margin to shrink 16% y-o-y to 23.2%.


Outlook

  • We remain optimistic on SingTel on the back of recovering associates and improvement in the enterprise segment. We note that there is still inertia after the resumption of smart nation initiatives, we expect these projects to spur demand in the enterprise segment. ICT service revenue should improve after a temporary blip in the Australian public sector.
  • On 5G, Optus plans on deploying 1,200 base stations by March 2020. The consumer use case in Australia is stronger due to a lower broadband penetration rate especially in rural areas. We believe SingTel’s early foray into 5G will help support a smoother roll out in Singapore.


Valuation

  • Maintain ACCUMULATE with a higher Target Price of S$3.31.
  • Our target price is based on FY20e 7X EV/EBITDA of SingTel’s Singapore and Australia businesses and the valuation of its listed associates. See attached PDF report for details.





Alvin Chia Phillip Securities Research | https://www.stocksbnb.com/ 2019-05-16
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 3.31 UP 3.270



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