SingTel - DBS Research 2019-05-15: Associates’ Profits Back On Growth Trajectory

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

SingTel - Associates’ Profits Back On Growth Trajectory

  • SingTel's 4Q19 underlying earnings of S$697m (+2.5% q-o-q, - 15% y-o-y) in-line with our expectations of S$717m; mainly due to Singapore’s underperformance.
  • FY20F outlook remains positive; management guides for core-EBITDA to be stable while we expect associates’ contribution to grow.
  • Maintain BUY with unrevised Target Price of S$3.55.

What’s New

4Q19 underlying profits of S$697m (-15% y-o-y, +2.5% q-o-q) in-line with our expectations of S$717m.

  • SINGTEL (SGX:Z74)’s key weakness was in its Singapore operations, with underlying profit dropping to S$162m (-28% y-o-y, -32% q-o-q) primarily due to weakness in the enterprise segment.
  • However, this was largely offset by a strong performance in Australia at S$220m (flat y-o-y, +29% q-o-q), led by A$49m sequential growth in National Broadband Network (NBN) migration fees (A$93m in 4Q19) and associates’ contribution of S$331m (-17%y-o-y, +14% q-o-q).
  • In our view, SingTel associates’ first sequential rise in contribution led by Globe in the Philippines and Advanced Info Service (AIS) in Thailand, after 7 consecutive quarters of decline, is a significant event.

Guidance for FY20F indicates a more positive outlook.

  • SingTel guided for FY20F revenue growth of mid-single digit and stable core earnings before interest, taxes, depreciation and amortization (EBITDA) (vs a decline of 7% y-o-y in FY19F). This is expected to be led by
    1. SingTel’s improving performance in Australia,
    2. much slower decline in the enterprise segment, led by the information and communications technology (ICT) segment
    3. improving profitability of digital businesses including its subsidiary Amobee.
  • We expect a marginal improvement in SingTel’s core EBITDA in FY19F, after factoring in potential ~A$15-20m growth in NBN revenues from Australia (A$184m in FY19).
  • We also expect associates’ profit contribution to rise in FY20F after declining for 2-years. This should be led by lower losses at Indian telco Bharti Airtel, due to its lower interest costs after the rights issue and SingTel’s lower stake in Bharti. Improvements in contribution from Indonesia’s Telkomsel, AIS and Globe should further support associates’ contribution in FY20F, in our view.

Interesting potential of regional associates.

  • We expect a rebound in SingTel’s underlying earnings in FY20F, driven by associates’ earnings which should lead to a narrowing of holding company’s discount (26% currently vs. 14% historically).
  • Associates’ contribution, which has been a critical factor driving SingTel’s share price, returned to a sequential growth trajectory in 4Q19 after seven consecutive quarters of decline. We expect associates’ contribution to improve sequentially going forward. See previous report: SingTel - Associates’ Earnings – Critical Factor For Singtel Stock Price – To Recover From 4Q19F Onwards.
  • The stock also offers an assured dividend per share (DPS) of 17.5 Scts (5.6% yield) committed until FY20F.

Maintain BUY with an unrevised Target Price of S$3.55.

  • We maintain our Sum-Of-The-Parts (SOTP) valuation at a target price (TP) S$3.55 and reiterate our BUY call on SingTel with an attractive dividend yield and a strong rebound in earnings in FY20F.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2019-05-15
SGX Stock Analyst Report BUY MAINTAIN BUY 3.550 SAME 3.550