SingTel - DBS Research 2019-08-13: Longer Wait For Earnings Recovery

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

SingTel - Longer Wait For Earnings Recovery

  • SingTel's 1Q20 underlying earnings of S$575m (-18% q-o-q, -22% y-o-y) was ~9% below ours and 15-20% below street expectations. Surprised by sharp weakness in Australia due to intense competition & weak economy.
  • Recovery of Australia may take 8-10 months, trim FY20F/21F earnings 6% each.
  • Maintain HOLD with a lower Target Price of S$3.25.

HOLD for 5.3% yield as share price is likely to remain range bound.

  • SINGTEL (SGX:Z74)’s associate profit contributions have been a critical factor driving Singtel’s share price, via changes in the holding company (Holdco) discount. After a 14% reduction in our valuation of the core business, Holdco discount hovers ~16% now versus 14% average historically and may only narrow in late FY20F (Mar YE) or early FY21F after recovery in Optus’ and associates’ profit contribution.
  • SingTel is not cheap at a 12-month forward PE of 18.3x versus 4-year average of 17.4x.

Where we differ:

  • Our FY20F/21F earnings forecasts are 9%/8% below consensus. We factor
    1. 4% core EBITDA growth in FY20F versus management guidance of high-single digit growth as we factor weak Australian economy and AUD;
    2. lower expectations from associates. Bharti’s revenue growth may not translate into narrower losses in the near term while Telkomsel is on a slower growth trajectory due to the loss of market share.

Potential Catalysts:

  • Sequential movement in associate contributions and monetisation of digital business. Potential sequential dip in associate contributions and a confirmed exit from digital businesses are key catalysts.

WHAT’S NEW - Weak 1Q20 performance led by Australia and Associates

  • SingTel's 1Q20 underlying earnings of S$575m (-18% q-o-q, -22% y-o-y) was ~9% below our expectations. The biggest disappointment stemmed from Australia which reported underlying earnings of S$111m (-49% q-o-q, -33% y-o-y) ~45% below our expectations.
  • Optus reported declines on both consumer and enterprise fronts, with EBIT declining 24% y-o-y, driven by weakness in both consumer and enterprise segments and 5.7% y-o-y depreciation of the AUD against SGD.
  • Mobile service revenue in Australia dipped ~7% y-o-y on constant currency terms, driven by higher uptake of SIM-Only plans, coupling with intense pricing competition bringing Consumer EBIT down by 12.6% y-o-y on constant currency terms (after adjustments to SFRS-16, ~18% decline in SGD terms). Australia enterprise segment reported an EBIT loss of A$6m vs. a positive EBIT of A$14m in the previous year, owing to growing pricing pressures on contract renewals and weak order flow from both the government and financial services sector.
  • Post-tax associate contributions of S$273m (-18% q-o-q, - 29% y-o-y) also came in below our expectations of S$290m mainly due to a higher loss of S$119m from Bharti Airtel.
  • Singapore operations made a stronger-than-expected comeback, with estimated underlying earnings of ~S$270m, ahead of our expectations, largely led by improvements in the margin profile of the enterprise segment and lower losses in the Digital Life! segment.

Singtel guides for high-single-digit growth on EBITDA post SFRS-16; expects a recovery in Australia to take 8-10 months.

  • SingTel updated its core EBITDA guidance, excluding NBN migration fee, from stable to high-single-digit growth to reflect accounting changes from SFRS-16. This seems high given 5% y-o-y decline in core-EBITDA in constant currency terms, excluding NBN migration revenues in 1Q20.
  • SingTel expects Australian operations to take ~8-10 months to recover supported by improving competitive dynamics and upward pricing revisions instituted in the mobile segment in August. This would be further supported by a potential recovery of demand from the financial services sector driving the Australian enterprise segment.
  • Stabilisation and improvements in Singapore’s enterprise segment should buttress EBITDA further.

Trim FY20F/21F earnings by 6% each as we model core EBITDA to improve only 4% y-o-y, after adjustments for SFRS-16.

  • Key factors are weak Optus and ~2% y-o-y depreciation of AUD against the SGD. Potential improvements in NBN migration revenues and further stabilisation of the Singapore enterprise segment should partially offset weakness in core- EBITDA excluding the impact of SFRS-16, in our view.
  • We trim our expectations for Optus, factoring in the poor performance and further delays in a recovery of the Australian enterprise segment and ongoing migration to SIM-Only plans on the mobile front. With upward adjustments in depreciation and amortization arising from SFRS-16, we expect SingTel’s core- EBIT to record a 9% y-o-y decline over FY20F.

Lower Target Price to S$3.25.

  • We trim our Target Price to S$3.25 from S$3.40 before, as we trim the valuation of the core-business by ~14% due to lower multiple and higher net debt due to new accounting standards. We use a 10% lower EV/EBITDA multiple of 6.3x vs. 7.0x before to adjust for the superficial improvements in EBITDA arising from SFRS-16 and to factor in weakening performance of Optus and continued depreciation of the AUD against SGD.
  • Impact of the lower core valuation was partially offset by recent improvements in the share prices of Bharti Airtel and AIS, which marginally drove up the valuations of associates.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2019-08-13
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.25 DOWN 3.400