STARHUB LTD (SGX:CC3)
SINGTEL (SGX:Z74)
NETLINK NBN TRUST (SGX:CJLU)
Singapore Telecom Sector - Re-setting Expectations
- Assuming COVID-19’s impact lingers throughout 2020, we cut our earnings forecasts by 9-10% for SingTel and StarHub.
- NetLink Trust (SGX:CJLU) is our top pick for earning resilience and ~5.8% yield.
- We also like SingTel (SGX:Z74) for ~5.4% dividend yield, nearly +2 standard deviation (SD) of its mean and StarHub (SGX:CC3) for 7% yield (near +1SD of its mean).
- Key risk will be stocks dropping to our bear-case valuation leading to a potential loss of 10% to 15%.
Earnings cut to factor in the impact of COVID-19
COVID-19’s impact may linger throughout 2020.
- The World Travel and Tourism Council has indicated that once the COVID-19 outbreak is over, it could take up to 10 months for the tourism industry to recover. A substantial and prolonged decline in inbound and outbound travel due to the prevailing COVID-19 situation is likely to result in a significant drop in the usage of roaming facilities.
- Roaming revenue in Singapore (12-20% of mobile revenue) will be the biggest casualty followed by prepaid mobile revenue (15-20% of mobile revenue). Roaming revenue might drop by as much as ~50% in 2020 due to the sharp decline in the number of business and leisure tourists, while prepaid mobile revenue might decline by ~20% due to a lower number of foreign workers.
We reduce Singtel’s FY21F/22F earnings forecasts by 10%/6%.
- Our earnings cuts come from three key changes:
- Roaming revenue could drop sharply in FY21F, leading to 6%/3% cuts in SingTel’s FY21F/22F earnings.
- ~10% drop in Australian Dollar (AUD) leading to another 2.5% cut in SingTel’s FY21F/22F earnings each.
- Bharti’s pre-tax contribution could be lower than our previous estimates due to higher-than-expected regulatory dues, leading to another 2% cut in SingTel’s FY21F/22F earnings each.
- We conservatively trim dividend per share (DPS) for SingTel to 14 Scts in FY21F (March YE) from 15 Scts earlier (vs. 17.5 Scts in FY20F) based on sustainable free cash flows. See SingTel Dividend History.
We cut StarHub’s FY20F/21F earnings forecasts by 9%/4%.
- This is mainly on the back of a sharp decline in roaming (12- 13% of StarHub's mobile revenue) and prepaid mobile revenue (18- 19% of its mobile revenue) in Singapore.
We prefer stocks with lower downside risks based on +2SD dividend yields.
- We turn towards a dividend-based analysis in the wake of COVID-19 to analyse the resilience of Singapore telcos. SingTel, for example, pays out almost 100% of its free cash flow (FCF) as dividends to its shareholders now versus 70-80% of FCF a decade ago. Hence, we prefer to use historical dividend yields as the primary valuation metrics rather than historical PERs.
Netlink is currently trading at ~5.8% yield.
- We argue that NetLink Trust should trade at a yield that is 80-100bps lower than industrial S-REITs’ as NetLink Trust’s
- distributions are largely independent of the economic cycle due to the regulated nature of its business,
- asset life is much longer as it incurs annual capex to replenish its depreciated asset base, and
- gearing is less than half of S-REITs’ with ample debt headroom to fund future growth.
- Assuming a 90-bp lower yield for NetLink Trust than large-cap industrial S-REITs’ historical yields, we estimate +1SD yield of 6.0% and +2SD yield of 6.8% for NetLink Trust. NetLink Trust’s net debt-to-EBITDA of less than 2x implies ample debt headroom. Regulated asset base (RAB) trusts can lever easily to 5x due to their earnings visibility and resilience.
- See NetLink Trust Share Price; NetLink Trust Target Price; NetLink Trust Analyst Reports; NetLink Trust Dividend History; NetLink Trust Announcements; NetLink Trust Latest News.
Singtel is trading near +2S.D. dividend yield of 5.7% even on our reduced estimate of a 14-Sct DPS.
- We cut DPS to14 Scts in FY21F from 15 Scts previously although capex cuts in FY21F/22F could support a 15-Sct DPS as well.
- See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.
StarHub is trading at 7.1% yield versus +1S.D. yield of 7.8% and +2S.D. yield of 9.3%.
- We project StarHub to maintain a 9-Sct DPS as the company should be able to save capex from its joint-bid with M1 for a 5G licence, which is expected to be awarded in mid-2020. StarHub’s gearing is one of the lowest in the region and the company could benefit from potential consolidation in the sector post 5G licence award.
- See StarHub Share Price; StarHub Target Price; StarHub Analyst Reports; StarHub Dividend History; StarHub Announcements; StarHub Latest News.
According to our bear-case analysis, Singtel and StarHub could drop to S$2.18 & S$1.00 respectively.
- According to our bear-case analysis, NetLink Trust’s share price could drop to S$0.76. In the case of continued market dislocation due to COVID-19, industrial S-REITs could decline to 7.7% (+2SD yield) from 6.2% currently. Given NetLink Trust’s higher earnings resilience, lower gearing and longer asset life, we project the share to trade at 90bps of 6.8% under our bear-case scenario. Based on current FY21F distribution per share of 5.2 Scts, it translates into a bear-case price of S$0.76 per share.
- Under this scenario, we assume SingTel to drop to an all-time high dividend yield of 6.2% as seen during the global financial crisis. We assume 13.5 Scts DPS under this scenario due to bigger macro worries vs.14Scts DPS under the base-case.
- As for StarHub, it may drop to +2S.D. dividend yield of 9% in case capex savings from joint-bid for 5G are less than expected.
- Historical PERs may be less relevant metrics due to much higher payout ratios. SingTel, for example, pays out almost 100% of its free cash flow (FCF) as dividends to the shareholders now versus 70-80% of FCF a decade ago. Hence, we prefer to use historical dividend yields as the primary valuation metrics rather than historical PERs.
- See attached PDF report for detailed analysis.
Company Guide:
Sachin MITTAL
DBS Group Research
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https://www.dbsvickers.com/
2020-03-26
SGX Stock
Analyst Report
1.40
DOWN
1.720
2.80
DOWN
3.520
0.950
SAME
0.950
