SingTel - CGS-CIMB Research 2019-06-13: EPS Has Bottomed; Growth In FY21-22F

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

SingTel - EPS Has Bottomed; Growth In FY21-22F

  • SINGTEL (SGX:Z74) hosted its annual Investor Day on 11 Jun.
  • Better associate earnings and narrower Group Digital Life losses will help offset earnings pressure from Singapore consumers, Group Enterprise & weaker A$ in FY20F, in our view.
  • Maintain ADD with a 3% higher target price of S$3.50. FY20-22F yield of 5.3% remains relatively attractive.

Group Digital Life losses to narrow; Amobee monetisation may be on the cards

  • SingTel sees Group Digital Life (GDL) losses narrowing in FY20F on
    1. higher EBITDA at Amobee, driven by high single-digit growth in net revenue ( > US$250m) and
    2. narrower HOOQ losses.
  • An Amobee IPO/stake sale to strategic investors is being considered. The latter may validate Amobee’s valuation at US$1.4bn (based on average 5.6x net revenue multiple from private market transactions), or 3.5% of SingTel’s market cap.

Telkomsel: Competition is improving in Indonesia

  • Telkomsel (30% of SingTel’s FY19 core net profit) says overall competition has improved. It raised tariffs due to Lebaran, with other players following suit. While Telkomsel sees tariffs coming back down post-Lebaran, it says it may carry out further price revisions a few weeks later.
  • Enforcement of prepaid registration has been robust and the regulator may further limit the number of SIMs to 5 per sub vs. 3 per network currently, which it thinks could further stabilise market competition.

Group Enterprise: Big hiccup in FY19, milder bumps in FY20F

  • Group Enterprise (GE) (40% of SingTel’s FY19 EBIT, ex-associates) saw very lumpy public sector contract renewals in FY3/19. Price erosion led to a sharp 12%/14% drop in managed services (ICT) revenue/EBIT.
  • While overall GE revenue is likely to stay under pressure (FY19: -2.3%) due to the structural decline in the cross-carriage business, it will be buffered by healthier ICT revenue growth in FY20F (FY19: +0.9%), in our view.

Competition stabilising in India; AIS is unsure on lifting payout ratio

  • Bharti says tariffs may have stabilised in India but may not rise until Vodafone-Idea has reached market share equilibrium. Globe thinks the entry of a third player is not a certainty, as there are still challenges in funding, network rollout and finding good local management.
  • AIS is unsure if it should lift its 70% payout ratio, even if the 900/1800MHz payment term is extended, citing potential future spectrum payments and 5G capex.

Maintain ADD with 3% higher target price of S$3.50

  • We see SingTel’s core EPS inching up by 1.8% y-o-y in FY20F (FY19: -21.4%), then growing 9.3%/5.5% y-o-y in FY21/22F.
  • Maintain ADD with a 3% higher SOP-based target price of S$3.50, after factoring in more optimistic consensus forecasts/valuations for Bharti and removing a previous 20% valuation discount as the Indian market is stabilising.
  • Potential re-rating catalyst: earnings recovery from 2HFY20F.
  • Downside risk: more intense competition in Australia, India and Singapore.

We value its associates at S$2.36 per Singtel share

Associates % of RNAV Stake (%) Value (S$m) Value/share (S$) Valuation Methodology
Advanced Info (ADVANC TB) 16.8% 23.3 6,870 Based on CIMB TP
Intouch (INTUCH TB) 4.6% 21.0 0.12 Based on consensus TP
Globe Telecom (GLO PM) 7.7% 3,159 0.19 Based on consensus TP
25.9% 35.2 10,575 0.65 Based on consensus TP
Telkomsel 35.6% 35.0 14,529 0.89
SINGAPORE POST (SGX:S08) 1.7% 25.7 676 0.04 Based on CIMB TP
NETLINK TRUST (SGX:CJLU) 2.2% 25.0 906 0.06 Based on consensus TP
Total NAV 38,611 2.36

Key highlights from Investor Day 2019

Group Digital Life

  • SingTel hopes to reduce HOOQ Amobee's profits to deliver improved financial performance in FY20F.
  • For Amobee, net revenue is in the next 1-2 years. The programmatic digital advertising spend in the US is projected to grow at a 2018-21 CAGR of 18%, according to eMarketer.
  • SingTel says it is committed to realising the value of its digital assets, with an IPO or sale to strategic investors being options under consideration. For the latter, SingTel pointed out that private market transactions have taken place at net revenue multiple of 3.3x-7.9x. Based on an average multiple of 5.6x, Amobee’s valuation may be validated at US$1.4bn, or 3.5% of SingTel's current market capitalisation.
  • On HOOQ, management says that it will continue to make opportunities for consolidation in the market and will focus on the operational matrices that will put it in a good position to participate when the opportunity arises.


  • Telkomsel believes that overall market competition is a few weeks later (depending on the spending reaction by subs to the tariff hikes during Lebaran).
  • On the enforcement of prepaid registration by regulators, Telkomsel says this has been carried out in a robust way. It says the regulator may further limit the number of SIMs to 5 per sub vs. 3 per network currently, which it thinks would further stabilise the market.

Bharti Airtel

  • Bharti Airtel believes that revenue has bottomed out over the past 9-10 months and that there is upside potential to ARPU of c.Rs200 a few years ago. However, in the near-term, it believes prices will likely be maintained until Vodafone-Idea reaches market share equilibrium and is able to manage merger/integration challenges.
  • Bharti believes that Jio will be aimed at acquiring quality customers.

Group Enterprise

  • SingTel says there were lumpy renewals of government ICT contracts in FY19. As a result, it saw substantial price erosion (though it was able to retain all of its contracts), which led to a sharp 12% drop in the Americas and EMEA region, where it derives only 35% of its revenue.
  • SingTel is also looking to unlock the value of its cybersecurity business, with a stake sale to strategic investors or an IPO as possible options.

Globe Telecom

  • The government has recently approved the transfer of ownership of Mindanao Islamic Telephone Co (Mislatel) to the consortium led by Udenna Corporation and China Telecom. Despite this, Globe believes a third player entering the market is still not a certainty. It highlighted challenges in network rollout (aggressive KPIs to meet, obtaining local permits), funding (on the local party side) and finding good local management.
  • It also pointed out the delay in Mislatel's service launch, which has been delayed from 2H19 initially to 1Q21.

Advanced Info Services

  • Advanced Info Services (AIS) is still considering whether it should buy the 700MHz spectrum. If it does, the benefit is that it will get a 10-year extension on its 900/1800MHz payment term (currently, the final 60% of upfront fee is to be paid in 2020). Nevertheless, even if this were to happen, AIS is still unsure if it should raise its 70% dividend payout ratio immediately, citing potential 2600MHz spectrum payments (it will know if there is an auction by end-2019) and 5G investments thereafter.
  • On fixed broadband, AIS hopes to maintain 1Q19’s strong net adds momentum, supported by room for industry penetration to rise further. It says ARPU may see further dilution due to price discounting, which it believes is still under control.

Singtel Singapore

  • Given limited consumer use TPG (which could commercially launch services in 2H19), given all the offers put out by incumbents and MVNOs in the past 12 months.


  • Optus believes that it can continue to grow profitable market share. Its focus will be on expanding network coverage in Australia and increasing capacity/speeds in major towns/cities, as well as differentiating its services such as leveraging its sports content rights.
  • Optus is launching 5 simplifying products, automating end-to-end processes and using artificial intelligence to make better decisions. Optus says this not only presents opportunities to significantly cut down on cost but also helps to improve customer net promoter scores (i.e. satisfaction).

FOONG Choong Chen CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-06-13
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