SingTel - UOB Kay Hian 2020-02-14: 3QFY20 Below Expectations, Enterprise Business Remains A Challenge

SINGTEL (SGX:Z74)

SingTel - 3QFY20 Below Expectations, Enterprise Business Remains A Challenge

SingTel (SGX:Z74) reported a 3QFY20 core net profit of S$551m (-25% q-o-q, -19% y-o-y) on the back of Optus’ challenging enterprise business and weak equipment sales. This was partly offset by higher regional associates’ contribution and higher NBN revenue9MFY20 earnings of S$1,863m accounts for only 70% of our forecast and is deemed below our expectations.
Cut FY20-22 net profit forecasts by 6% for each year.

Maintain HOLD with a lowered S$3.20 target price in tandem with the earnings change.
Entry price: S$3.00.

SingTel (SGX:Z74) reported a 3QFY20 core net profit of S$551m (-25% q-o-q, -19% y-o-y). Results were adversely affected by:
1. challenging operating parameter for Optus enterprise,
2. lower handset sales with the launch of unbundling mobile plans in Optus, and
3. higher depreciation as well as interest charges.
This was partly offset by higher NBN revenue amid network expansion in Australia. Headline net profit came in at S$627m (-24% y-o-y) with the inclusion of a S$92m gain on disposal of property for the quarter. 9MFY20 core net profit of S$1,863m accounts for 70% of our full-year expectation. Results are below expectations.

Singapore (market share: 49.9%) mobile revenue contracted 7% y-o-y (flat q-o-q) on the back of 9% y-o-y declined in equipment sales while voice and roaming call usage continue to fall (Coronavirus impact: near term, expect roaming revenue to slide due to lesser travel activities). The number of post-paid subscribers increased 34k with SIM-only plans gaining traction.
Post-paid ARPUs stabilised at S$39/month (2QFY20: S$39/month, 3QFY19: S$43/month). Prepaid subscriber numbers dropped 23k and ARPU fell to S$16/month (2QFY20: S$17/month, 3QFY19: S$18/month) with competition from free SIMs in the market.
In Australia, Optus mobile revenue (-9% y-o-y) was dragged down by lower equipment sales (-17% y-o-y) with the newly launched Optus Choice unbundled plans. Optus added 52k post-paid subscribers but post-paid ARPU fell 7% y-o-y to A$38/month amid higher mix of SIM-only customers. Overall revenue rose 1% y-o-y and this reflects higher NBN migration revenues (3QFY20: A$233m vs 3QFY19: A$44m) and a 6% y-o-y appreciation of the SGD vs AUD.

Enterprise revenue fell 4% y-o-y on the back of lower legacy revenue (fixed voice: -18% y-o-y, mobile service: -11% y-o-y) while compliance-related businesses have slowed down substantially within the financial service industry in Australia.
ICT revenue was 16% y-o-y lower for Optus due to soft demand as consumers shift towards cloud service. This was partly mitigated by a 5% y-o-y growth in Singapore‘s ICT revenue thanks to more system integrations projects being taken up and more data center service contracts being secured in the country. EBITDA fell 11% y-o-y and 2% q-o-q.

Revenue from digital marketing dropped 15% y-o-y due to cautious advertisement spending by major customers and declining social media and e-mail revenue streams. This was partly offset by higher mix of programmatic advertising as Amobee secured licensing fees from ITV plc after delivering an enhancement to its advertising platforms.
Coupled with good cost discipline, EBITDA losses narrowed to S$8m (vs S$16m 3QFY19) despite lower legacy revenue.

Associates’ PBT surged 13% y-o-y, underpinned by:
1. narrowed Airtel core losses (3QFY20: -S$70m. 3QFY19: -S$120m) thanks to improved mobile ARPU in India (+30% y-o-y) and higher contribution from Airtel Africa, as well as
2. strong growth in data revenue from Globe Telecom.
This was partly offset by weaker performance in Telkomsel due to intense competition in ex-Java region. In India, telcos including Bharti Airtel have filled a modification appeal against the AGR ruling in a bid to extend the dues payment deadline. As such, SingTel recorded a S$70m in relation to interest provisioning on the dues from Airtel.

Cost savings for 9MFY20 amounted to S$359m due to the group’s efforts to lower content cost through renegotiation, and keep a tight lid on cost structure via the digitisation initiatives.

Management has revised downwards its revenue and EBITDA guidance:
1. FY20 revenue revised to stable from mid single-digit growth, and
2. FY20 EBITDA to fall by low single digit from stable.
This reflects:
1. lower equipment sales in Australia amid softer demand for mobile bundle plans (as customers opt to purchase handsets from electronics chains), and
2. lower margin from ICT business and weak business sentiments.
Management will likely maintain dividend of 17.5 S cents for FY20, translating into a net dividend yield of 5.3%.

Cut FY20-22 net profit forecasts by 6% for each year to account for:
1. lower equipment sales from Optus,
2. lower contribution from enterprise, and
3. higher finance charges with increasing average borrowing.
This will be partly supported by the improving regional associates’ outlook and good cost discipline.

Maintain HOLD with a marginally lowered DCF-based target price of S$3.20 (COE: 6.2%; terminal growth: 1%), or 14x FY20F EV/EBITDA.
At our target price, the stock trades at +1SD of its mean 5-year EV/EBITDA mean of 13x.
Entry price is S$3.00.
See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2020-02-14

SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.20 DOWN 3.320