SingTel - DBS Research 2019-10-10: Excessively High Street Numbers, Unsustainable Dividends

SGinvestors.io

SINGTEL (SGX:Z74)

SingTel - Excessively High Street Numbers, Unsustainable Dividends

• Trim FY20F/21F earnings by 5%/3%, bringing us 10%8% below consensus.
• We estimate that SINGTEL (SGX:Z74) may reduce dividend per share to 13-15 Scts in FY21F to maintain its credit rating.
• Maintain HOLD with a lower Target Price of S$3.12.

Outlook still challenging, dividends unsustainable.

• Regional associates’ profit contribution has been a critical factor driving Singtel’s share price, via changes in the holding company (Holdco) discount. After a 10% reduction in the value of SingTel’s core business, Holdco discount hovers at ~13% (vs. 15% historical average) and may widen given
  1. lack of clarity on Bharti Airtel’s path to profitability, and
  2. meager growth from Telkomsel, which is losing revenue share in Indonesia.
• We estimate that SingTel may reduce its dividend per share to 13-15 Scts in FY21F to maintain its credit rating. However, we expect earnings growth to resume in FY21F. See SingTel's dividend history.
• Negatives are mostly priced in, in our view.

Where we differ: Our revised FY20F/21F earnings forecasts are 10%/8% below consensus.

• We factor in
  1. 2% core EBITDA growth in FY20F (4% earlier) vs. management guidance of high single-digit growth due to weak Australian economy and Aussie dollar, and
  2. lower expectations from associates given a longer-than-expected recovery in Bharti’s profitability.
• See attached PDF report for complete analysis.

Outlook remains challenging than what the street projects

Singtel’s core EBITDA may fall short of expectations due to weak Australian economy.

• SingTel has guided for high single-digit EBITDA growth for FY20F in constant currency terms excluding National Broadband Network (NBN) migration revenues from Australia. In 1Q20, SingTel reported a 5% y-o-y decline in core-EBITDA in constant currency terms, excluding NBN migration revenues.
• However, Optus adds to SingTel’s woes with mobile growth in Australia likely to be below our expectations. While recent uplift in mobile pricing is expected to be positive for industry profitability over the medium term, new price plans will take time to be factored in.
• In response to the release of Telstra’s new plans in June, Optus in turn increased its postpaid package pricing in August while Vodafone took measures to withdraw data inclusions from its lower-priced plans. In addition, weak economic outlook will continue to weigh on AUD (4% depreciation against SGD since April 2019) and Optus enterprise segment.

Bharti’s recovery is tied to the fortunes of Vodafone-Idea.

• Without tariff revisions and the continued pressure on Bharti’s fixed segment from Jio, the path to profitability for Bharti is likely to be delayed. At present, Bharti’s losses are the biggest overhang on SingTel associates’ recovery. We expect Bharti to recover when Jio raises tariffs once it becomes difficult to seal subscribers from Vodafone-Idea.
• Vodafone Idea has faced challenges in its network integration process, including logistical issues and the removal of duplicate sites. The telco lost ~14m subscribers in the April-June quarter alone, with many customers citing poor service quality as a result of the ongoing integration between the networks of the two merging telcos. Vodafone Idea has indicated that it is on track to meet its network integration target of June 2020 and as at the end of September, the telco had completed the network integration process in 11 out of 22 circles. We only expect a tariff revision once Vodafone Idea’s network has been upgraded. At that point, Jio’s rampant subscriber additions will significantly slow down and the telco will prefer to raise prices instead of gaining more subscribers, benefitting Bharti in the process.
• Over the past three years, despite all the drama that unfolded with the entry of Jio, Bharti has managed to maintain its mobile revenue market share stable at ~30%. This was mostly due to the bulk of India’s high-end postpaid users (who account for ~4-5% of mobile subscriber base and generate ~25% of mobile service revenues) preferring to remain with the incumbent telcos possibly due to the comfort of regular customer service and better roaming deals. However, Jio has set its sights on the postpaid mobile segment to lure away these lucrative customers by bundling Jio’s home broadband service with postpaid offerings and also by offering customised enterprise offerings to the postpaid customers.

Telkomsel is struggling to defend its market share outside Java.

• Telkomsel generates the bulk of its revenues (~70%) from ex- Java territories. We estimate that the telco has lost ~2.7% revenue market share over the past three quarters. In our view, Telkomsel’s market share losses could continue into 2020 with XL Axiata’s (EXCL) aggressive pricing plans and Indosat’s (ISAT) network expansions.
• EXCL is reportedly planning to double its ex-Java market share over the course of the next five years. We believe that the bulk of these gains would come from Telkomsel’s pie as:
  1. EXCL aggressively bridges its network gap with Telkomsel, and we may see price-sensitive customers switching to EXCL,
  2. EXCL is striving to maintain a 30% pricing discount to Telkomsel on the data front, further inducing subscribers to switch carriers, and
  3. EXCL is becoming the second operator in most second-and third-tier cities. Hence, any market share gains for EXCL would stem from Telkomsel.
• EXCL is also at an advantage with its lack of exposure to legacy revenues, which are declining at an accelerating pace in ex- Java regions as seen in Telkomsel’s recent quarterly results.
• Telkomsel, which generates ~70% of its top line from regions outside Java (vs. ~20-25% for EXCL), has seen legacy revenues contracting in the past few quarters, primarily due to rising smartphone adoption in ex-Java regions supported by the proliferation of cheap Chinese handsets. This could further exacerbate revenue share losses for Telkomsel in the region.
• Meanwhile ISAT, after years of inadequate investment, has set aside US$2bn (~Rp30tr) for network expansion over the next three years to catch up with Telkomsel and EXCL. Our checks indicate that ISAT's network is getting better and the telco is likely to cause some disruption in ex-Java over the next 12-18 months as it continues to expand in ex-Java territories, adding further woes to Telkomsel’s worries.

Globe is facing heightened new entrant risks.

• We expect competition in the telco sector of Philippines to intensify as the government has given the go ahead to a fourth major commercial mobile operator shortly after its third. The government has also indicated that it is not averse to allowing a fifth player into the market, effectively putting an end to the duopoly between Globe and Smart.
• DITO Telecommunity (DITO), the third mobile player of Philippines, plans to distribute SIM cards by 4Q19 and launch commercial operations by early 2020. Under its commitments to the National Telecommunications Commission (NTC), DITO is obligated to cover at least 37% of the population by 8 July 2020, failing which a P25.7bn (~US$ 500m) bond posted at NTC would be forfeited. In October 2019, DITO announced partnerships with SkyCable Corporation and Luis Chavit Singson, a local politician who launched a failed bid to acquire the third telco slot in 2018. DITO is expected to benefit from SkyCable’s unused fibre optic cables within Metro Manila and the deal with Singson’s LCS Holdings is likely to help DITO in building new telco towers in key areas of the country.
• Meanwhile, the ground has been cleared for the entry of the fourth telco player into the Philippines. NOW Telecom (NOW), which has a 25-year congressional franchise to provide telco services throughout the Philippines, has also bagged a mobile telecoms licence. NOW bid for the third commercial mobile licence in 2018 but was ultimately beaten by Mislatel Consortium (rebranded as DITO). NOW plans to launch 5G services and build out a backbone network across the archipelago in partnership with Singapore’s HyalRoute Group.
• Globe is unlikely to see a major impact in the immediate term from the third operator, in our view, given its extensive coverage and perception among subscribers. We do not expect to see a major disruption to contributions from Globe in the near term arising from the entry of the third operator.

AIS seems to be the only associate sailing in relatively calm waters.

• Data prices in Thailand have stabilised with the introduction of more reasonably priced limited data plans over 1H19, which should help operators to stabilise data yields going forward. With this, we believe that postpaid users will be migrating to more reasonable data plans over 3Q19F. We also expect to see an acceleration in the industry subscriber base gain in 2H19F, thanks to the improving sentiment in the tourist SIM segment from the low base recorded in 2H18.
• Milder competitive dynamics and a reacceleration of mobile data revenues are likely to support steady growth in contributions from AIS going forward.

We trim our FY20F/21F earnings by 5%/3.4%.

• We trim our expectations for Optus, factoring in delays in a recovery of the Australian mobile and enterprise segments, sharper declines in AUD/SGD rate, and ongoing migration to SIM-Only plans on the mobile front. 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 Singapore Financial Reporting Standards – 16 (SFRS-16), in our view.
• With upward adjustments in depreciation and amortisation arising from SFRS-16, we expect SingTel’s EBIT to record a 12% y-o-y decline over FY20F. Taking in to account potential delays beyond 2020 in reaching sustainable profitability, we have increased projected losses from Bharti over FY20F and trimmed our expectations on profits from Bharti over FY21F.

Singtel may need to curtail dividends to maintain its credit rating.

• In March 2019, credit ratings agency, Moody’s Investors Service, revised SingTel’s credit ratings outlook from “Stable” to “Negative” citing continued pressure on SingTel’s EBITDA and cash flows. The credit ratings agency stated that it may consider downgrading SingTel’s credit rating, should the company’s Net Debt-to-Adjusted EBITDA (Core EBITDA plus cash dividends from associates) remain elevated at over 2.0x or if Singtel’s core EBITDA margins continue to remain below 30%.
• We expect SingTel to likely report core-EBITDA margins below 30% over the next two years owing to pricing pressures in mobile markets in Singapore and Australia and growing contribution of low-margin ICT service businesses to SingTel’s enterprise segment. SingTel’s Net Debt-to-Adjusted EBITDA as per our estimates would remain above 2x (accounting for operating leases as debt based on SFRS 16), should SingTel continue to maintain its dividends at current levels. Hence, we project SingTel to divert from its fixed dividend policy and peg dividend payouts to underlying earnings to relieve some burden off its balance sheet. Based on our estimates, SingTel may trim its dividend per share to 13-15 Scts post FY20F from 17.5 Scts currently. Potential monetisation of digital businesses or divestment of data centre business may help uplift cash flows and SingTel may not need to cut dividends in that case. See SingTel's dividend history

Revise our Target Price to S$3.12.

• We trim our Target Price to S$3.12 from S$3.25 before, as we reduce the valuation of the core-business by ~10% due to revised earnings and lower multiples. We use a 5% lower EV/EBITDA multiple of 6.0x vs. 6.3x before to value SingTel’s core operations to factor in weakening performance of Optus, continued depreciation of the AUD against SGD, and weak fundamentals on the Singapore mobile front.
• Impact of the lower core valuation has been much felt since the decline in the share prices of Bharti and Globe, which decreased the valuations of SingTel’s regional associates.

See attached PDF report for complete analysis.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2019-10-10

SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.12 DOWN 3.250