SingTel 3QFY20 Results Preview - UOB Kay Hian 2020-02-10: Not Quite Out Of The Woods

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

SingTel 3QFY20 Results Preview - Not Quite Out Of The Woods

  • SingTel's 3QFY20 results will likely be characterised by potential Bharti impairment (albeit a smaller amount vs 2QFY20), higher interest expense and challenging Optus enterprise.
  • The positives will likely stem from Singapore’s easing competitive landscape as we note that the iPhone 11 customer acquisition cost may have been lower than last year. This points towards good cost discipline.
  • All in all, we expect core net profit of S$650m-700m for 3QFY20.
  • Maintain HOLD. Entry price: S$3.00.



WHAT’S NEW


3QFY20 results preview.

  • We expect SingTel (SGX:Z74) to report 3QFY20 (to be released this Thursday) core net profit of S$650m-700m. This is likely a sequential contraction of 10% given:
    1. higher interest expense q-o-q as 2QFY20 saw a S$18m net finance income thanks to accrual income from pre-IPO investment in Airtel Africa,
    2. challenging operating parameter for Optus enterprise, and
    3. decline in digital legacy business.
  • Headline net profit may be dragged by further provision from Bharti, as we note that Bharti recognised an INR10.5b (~S$0.2b) interest on adjusted gross revenue (AGR) dues for this quarter. This will likely be partly offset by narrowing ARPU dilution given a relatively stable Singapore telco landscape and seasonally higher handset revenue (launch of iPhone 11 plans).
  • Positively, we note that the new iPhone 11 series mobile plans came at lower subsidies, suggesting customer acquisition cost will not spike too much in 3QFY20.

Group Consumer: Rational competition prevails in the quarter.

  • Broadly, we believe the operating landscape may have stabilised in 3QFY20 and will look out for narrowing ARPU dilution in the quarter. In essence, we expect Singapore mobile revenue to drop c.5% in year 2019 as a result of declining voice and 1HFY20 price competition. This is to be partly offset by seasonally higher handset revenue, which will help stabilise postpaid ARPU at S$39/month.
  • Importantly, we note that the subsidy cost for IPhone 11 has been reduced (see RHS table overleaf) vs last year’s iPhone X plans. In Australia, Optus’ earnings will be affected by a 2% y-o-y depreciation of the AUD but is likely to be offset by higher National Broadband Network (NBN) migration revenue on the back of increasing network rollout in the country.

Group Enterprise: Weak business sentiment continues into 3QFY20.

  • We expect enterprise segment to remain weak as compliance-related businesses have slowed down substantially for financial institutions in Australia. This is expected to be partially offset by the resumption of public-sector jobs in Singapore as most contract renewals with the government have been renegotiated, albeit at lower margins.

Group Digital: Potential drop in legacy business.

  • SingTel’s digital marketing arm is expected to shrink amid more cautious spending by Amobee's clients and a drop in social media and e-mail revenue streams. We expect management to focus on programmatic adverstising and e-wallet business (Singtel’s Dash).

Group regional associate: Narrowed Airtel losses with improved ARPU.

  • SingTel’s 35.2%-owned Airtel has cut down this quarter’s core net loss to INR10.4b (vs INR 11.2b in 2QFY20), boosted by improved mobile ARPU (+30% y-o-y, +6% q-o-q) amid a recent mobile tariffs hike, as well as Airtel Africa’s stellar performance with revenue jumping 14% y-o-y. This is also helped by Globe’s 20% y-o-y growth in net profit for the quarter thanks to higher data consumption. However, AIS’ 4Q19 earnings (-19% y-o-y) were impacted by higher SG&A expenses, where a potential Bt31b (~S$1.37b) compensation to a Thai state-owned telco TOT may weaken the company’s earnings outlook.
  • In India, Supreme Court has rejected the review petition from the telcos, with Airtel ordered to pay total dues of INR342.6b (~S$6.7b) AGR payable to the government. We see minimal impact to the company as Airtel had earlier set aside a provision of INR284.5b (~S$5.4b) during 2QFY20 earnings, while SingTel has made S$1.4b during the same period for AGR.
  • Positively, Bharti Airtel’s recent successful capital raising of US$3b (~S$4b) for the AGR dues has mitigated uncertainty over the business continuity. While the telcos In India are filing a modification appeal against the AGR rulling in a bid to extend the payment deadline, Bharti has recorded an interest provisioning on the dues amount to INR10.5b (S$0.2b) in this quarter. That said, SingTel is likely to incur a provision of c.S$70m for the coming quarter.


STOCK IMPACT


Dividend yield of 5.3% for FY20.

  • Management will likely maintain an ordinary dividend of 17.5 S cents for FY20. This translates into a net dividend yield of 5.3%. Beyond FY20, we have pencilled in a dividend payout policy of 85% vs 100% in FY20. Management has re-iterated its stance of balancing shareholders’ return with a desire to stay within investment grade for funding cost purposes.

Higher capex as telcos shift into the next 5G investment cycle.

  • The regulator is expected to allocate 5G spectrum by 1H20. We expect additional S$1b-2b capex per nationwide 5G telco as Singapore aims for a 50% population coverage by end-22 and nationwide coverage by 2025. Assuming a capex budget of S$1b-2b per operator, SingTel’s capex intensity will increase to 14-16% for FY20-21 (FY19: 10%; FY18: 13%).


EARNINGS REVISION/RISK

  • No change to our earnings forecast.
  • year net profit CAGR of 6.5% in FY19-22, underpinned by el in the next three years.


VALUATION/RECOMMENDATION






Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2020-02-10
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.320 SAME 3.320



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