SingTel - DBS Research 2019-05-13: Associates’ Earnings – Critical Factor For Singtel Stock Price – To Recover From 4Q19F Onwards

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SINGTEL (SGX:Z74)

SingTel - Associates’ Earnings – Critical Factor For Singtel Stock Price – To Recover From 4Q19F Onwards

• SingTel (SGX:Z74) to report 4Q19F underlying earnings of S$717m (+6% q-o-q, -11% y-o-y) on 15 May (see SingTel's announcements) led by Globe.
• Associate earnings to return to a growth trajectory in 4Q19F, after 7 consecutive quarters of declines.
• Maintain BUY with an unchanged Target Price of S$3.55.

Singtel looks interesting on the back of regional associates.

• We expect a rebound in SingTel (SGX:Z74)'s underlying earnings over FY20F driven by associates’ earnings which should lead to narrowing of holding company discount (26% currently vs. 14% historically).
• Associates’ contribution, which has been a critical factor driving Singtel’s share price, is set to return to a sequential growth trajectory in 4Q19F, after seven consecutive quarters of declines. The stock also offers an assured DPS of 17.5 Scts (5.6% yield) committed till FY20F.

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

• We project a 0.3% y-o-y decline in FY20F core EBITDA versus consensus’ projection of a 1.3% rise. We model a S$88m (- 4.2% y-o-y) drop in Singapore EBITDA due to a weak enterprise (slow order flow from Smart Nation projects and declines in legacy carriage revenue), and mobile segment. This should be offset by S$75m rise in Optus’s EBITDA, supported by ~A$50m rise in National Broadband Network (NBN) migration fee

Potential Catalysts:

• Airtel Africa IPO, tariff-hike in India, monetisation of digital business. The public listing of Airtel Africa in London in June 2019 could allow SingTel to monetise its stake. Upliftment of tariffs in India (our base case is for stable tariffs), or a partial exit from digital businesses are key catalysts.

Valuation:

• We maintain our Sum-Of-The-Parts (SOTP) valuation at S$3.55 and reiterate our BUY call on SingTel.

Key Risks to Our View:

• Bear-case valuation of S$2.70 suggests ~8% downside risk. This scenario assumes an absence of EBITDA growth at Bharti in FY20F and further weakness in core EBITDA in Singapore.

SingTel's 4Q19F earnings preview

Associate profits to register first sequential growth in 4Q19F.

• We estimate SingTel’s 4Q19F core earnings to come in within range of S$717m (+6% q-o-q, -11% y-o-y) with room for further upside subject to any recognition of exceptional gains from Bharti Airtel.
• We believe that associate earnings are likely to grow sequentially over 4Q19F, the first q-o-q growth since 4Q17, driven by a ~S$40m growth in contributions from Globe, offsetting ~S$8m lower contributions of Telkomsel and ~S$13m lower contributions from Bharti Airtel.
• Optus is also likely to record a 27% q-o-q improvement in earnings, driven by a seasonally stronger 4Q and S$6-9m growth in NBN migration fees, partially offset by ~2% q-o-q depreciation of the Aussie Dollar.
• SingTel’s Singapore operations are likely to contract ~10% q-o-q, driven by a seasonally weak 4Q.

Associates’ earnings contributions likely to return to a q-o-q growth trajectory for the first time since 4Q17.

• Growth in associate contributions would be driven by ~S$40m q-o-q growth in contributions of Globe, which reported a seasonally stronger quarter in 4Q19 (1Q19 for Globe with December Year End), driven by strong top-line performance and improvement in margins.
• We believe growth in contributions from Globe and AIS would adequately offset the S$8m and S$13m drop in contributions from Telkomsel and Bharti Airtel. There is potential upside to our forecast of earnings contributions from Bharti, if SingTel recognises a portion of Bharti’s exceptional gain under the underlying profits.

a) Globe has reported strong results and AIS likely to record low-to-mid single-digit growth in earnings.

• Globe reported 1Q19 revenues of ~S$1,052m (+10% y-o-y, +3% q-o-q), fuelled by increasing data usage across the operator's service offerings. During the quarter, the telco’s mobile service revenue grew 11% y-o-y, as a result of strong data revenue growth even though mobile voice revenues fell by 15% y-o-y. Mobile data continued to be the main contributor to the company’s mobile business, accounting for ~61% of gross service revenues up from 47% a year ago.
• EBITDA for 1Q19 reached ~S$516m, up 26% q-o-q (+24% y-o-y) at an all-time high, supported by higher revenues, a 16% decline in operating and subsidy expenses on a q-o-q basis and a marginal reduction of lease expenses from the adoption of Philippine Financial Reporting Standard (PFRS) 16 in January 2019, driving EBITDA margins up by almost 10% q-o-q to reach 55% during the quarter. For 1Q19, Globe reported earnings of ~S$ 174m, up +76 q-o-q (+44% y-o-y).
• AIS, on the other hand, delivered relatively flat earnings in FY18 due to the intense competition in mobile cellular business. Nonetheless, we have seen positive signs of a turnaround and we believe that AIS will at least maintain its revenue market share since the telco is still in a good position to monetise its large subscriber base. We expect AIS to deliver mid-single-digit core service revenue growth with flat margins during 1Q19F (4Q19F for SingTel).

b) Bharti showing signs of improvement

• Bharti showed signs of improvement over 4Q19, reporting a 4% and 2.7% improvement in mobile service revenue from India on a q-o-q and y-o-y basis respectively. EBITDA is likely to have expanded ~6% q-o-q (-5% y-o-y), with ~170bps q-o-q improvement in margins, driven by Bharti Airtel’s “War on waste” cost-cutting initiatives. Bharti reported a net loss (Loss before exceptional gains adjusted for taxes) of INR14.5bn (~S$283m) before exceptional gains. Losses expanded over 4Q19, with an uptick in net finance expenses amidst continuing network expansions by Bharti.
• Bharti recognised an exceptional gain of INR20bn (~S$395m), allowing the telco to report net earnings attributable to parents of INR1bn (~S$21m). Airtel Africa, in which we estimate SingTel holds a stake of ~5.7%, reported a profit of US$89m (-10% q-o-q), driven by an increase in net finance costs and a 5% q-o-q dip in the top line, offsetting the impact of q-o-q improvements in EBITDA margin profile.
• We expect SingTel to recognise a loss of ~S$100m from Bharti Airtel in 4Q19F, after factoring in the losses from Bharti and SingTel’s stake in Airtel Africa. SingTel may recognise a lower loss from Bharti Airtel under underlying profits, depending on the nature of the exceptional gain recognised by the latter.

c) Contribution from Telkomsel likely to dip 3% q-o-q in 4Q19F

• Telkomsel reported a net profit of Rp6,473bn (+0.9% y-o-y, - 10.6% q-o-q), owing to a weak top line. Telkomsel’s top line dipped 5.6% q-o-q (+1.4% y-o-y) with a 14% q-o-q decline in legacy revenues and a surprising 0.75% q-o-q decline in data revenues. Data yields slipped 9.1% over 1Q19, with amplifying competitive conditions in ex-Java regions, marking the second consecutive quarter of declines in data yields for the telco.
• We believe Telkomsel may have lost revenue market share, especially in regions outside Java, for the second consecutive quarter in 1Q19, to XL Axiata, Telkomsel’s key competitor outside Java.
• Going by contributions to non-controlling interest recognised by Telkom Indonesia and a 3% appreciation of the Indonesian Rupiah against the Singapore Dollar, we expect contributions from Telkomsel to dip 3% q-o-q over 4Q19F.

Core businesses likely to post earnings of S$407m (+4.8% q-o-q, -0.5% y-o-y).

• Sequential growth in core earnings would be driven by Optus, which is poised to record an improvement of ~27% q-o-q, driven by a seasonally stronger 4Q further supported by ~A$6-9m improvement in NBN migration fees. A 2% q-o-q drop in the Aussie Dollar against SGD however, is likely to partially offset growth from Optus.
• SingTel is likely to post a weak quarter, with earnings dipping 10% q-o-q, largely driven by weakness in the mobile segment. SingTel could also record cost savings of ~S$100-150m over the quarter (vs. S$320m over 9M19 and an annual target of S$500m).

Associate contributions to rebound stronger 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.

a) Bharti poised to enter EBITDA growth territory in FY20F

• Competitive conditions in the Indian mobile market show signs of improvement with stable tariffs 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. Jio is expected 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 onto 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 in 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. 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. We believe that a considerable portion of proceeds raised through fund raising exercises of Bharti Airtel, including the on-going rights issue of INR 250bn, INR7bn perpetual bond offering and the planned IPO of Airtel Africa scheduled to take place in mid-2019, would be used to settle Bharti’s debt, allowing Bharti to lower net finance costs and gain some relief to par expected losses for FY20 (March YE).

b) Contributions from Telkomsel to expand in mid-high single digits.

• We believe contributions from Telkomsel would expand ~7%/6% over FY20/21F, adding S$80/69m to SingTel’s pre-tax earnings, supported by a ~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.

c) Low-mid single digit growth from AIS and Globe over FY20/21F.

• Competition in the Thai mobile market has somewhat stabilised, after the transition of Total Access Communication (DTAC) from a concession to licence business model in FY18. AIS has guided for ~4-6% growth in core-service revenues over FY19, led by stable or marginal improvements in revenue market share in the mobile segment and growth in fixed broadband service offerings. Operating expenses also have room to edge down marginally, with AIS opting to run more selective marketing campaigns and further declines in regulatory expenses. We project contributions from AIS to expand 5%/4% over FY20/21F respectively.
• Globe also continues to perform well, despite tight competition in both mobile and fixed broadband segments from PLDT. Globe guided for high-single digit growth in service revenue for FY19F with annual EBITDA margins set at low-50s, slight below levels recorded over 1Q19. Supported by continued improvements in the topline and EBITDA we expect Globe’s associate pre-tax contributions to grow in FY20/21F by 4%/0% y-o-y respectively.

We project a 0.3% y-o-y decline in FY20F core EBITDA versus consensus’ projection of a 1.3% rise.

• We model a 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 the mobile segment. This should be offset by S$75m rise in Optus’s EBITDA, supported by ~A$50m rise in National Broadband Network (NBN) migration fee (vs ~A$50m drop in FY19F)

a) Core businesses in Singapore under pressure

• We expect Singapore EBITDA to remain under pressure over FY20F, with pressure mounting up in both consumer and enterprise segments. Singapore’s mobile segment, which accounts for ~30% of the Singapore top line, is likely to witness a 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 fourth mobile operator, TPG, in 2Q19. SingTel’s Pay-TV segment is on a downward spiral with ongoing subscriber migration to Over-the-top (OTT) services.
• SingTel’s management indicated that Smart Nation orders have resumed in 3Q19 and have picked up pace and that they expect to see a better contribution starting from 4Q19F. However, we believe that Singapore government would adopt a more cautious approach when expanding Smart Nation projects in the near term. Hence, the Singapore enterprise segment would continue to remain under pressure over FY20F, with slower growth in smart nation orders, pricing pressure from StarHub (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-to 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 the consumer segment would continue to remain under pressure. We expect to see ~1% decline (S$24m) in EBITDA from Singapore over FY21F.

b) Resumption of NBN fees and growth in Optus’ operations to support core 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’s 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.
• 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. 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 the base case valuation details of SingTel.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2019-05-13

SGX Stock Analyst Report BUY MAINTAIN BUY 3.550 SAME 3.550