SingTel - DBS Research 2020-04-17: Bharti’s Recovery On Track, 5.4% Yield With Growth As A Bonus

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SINGTEL (SGX:Z74)

SingTel - Bharti’s Recovery On Track, 5.4% Yield With Growth As A Bonus

• Raise SingTel (SGX:Z74)'s FY21F dividend per share to 15 Scts from 14 Scts on HOOQ’s liquidation and potentially slower 5G capex.
• Associate recovery will accelerate into FY21F led by Bharti, pushing SingTel into growth territory despite COVID-19.

Raise FY21F DPS; Bharti’s recovery on track

Raise FY21F DPS to 15 Scts from 14 Scts previously due to the absence of losses from HOOQ and lower capex projections.

• HOOQ Digital, a joint-venture company in which SingTel has an indirect 76.5% effective interest, commenced a creditors' voluntary liquidation. HOOQ was incurring S$15-20m losses each quarter which is likely to stop from 1Q21F onwards. This is likely to boost SingTel’s bottom line by S$60-65m each year in FY21F/22F.
• We also cut SingTel’s FY21F/22F capex by over S$100m each (~5%). We previously projected a rise in capex due to 5G but now forecast stable capex for SingTel as the operator will be more careful in spending on 5G rollout in the wake of weaker economic conditions. This will boost its free cash flow and hence we raise our FY21F/22F DPS to 15 Scts from 14 Scts earlier.

Capex may not rise much due to slower 5G

5G infrastructure vendors to face supply-chain issues.

• The virus pandemic has resulted in a crippling effect and 5G’s reliance on Tier 1 infrastructure vendors and their supply chain has been disrupted. The lack of component manufacturing and network workforce deployment of integration engineers, etc. are the core reasons for this disruption. According to ABI research, this disruption will cause 2020 5G network infrastructure revenue to dip by 10%.

5G smartphone purchase to be impacted.

• We are also seeing 5G enabled devices’ launches being delayed (including Apple’s 5G iPhone) due to supply chain disruption. Moreover, the sale of 5G-enabled devices might take a hit because consumers who had earlier wanted to purchase these devices have reprioritised their spending.

Difficulty in getting new site approvals for base stations.

• 5G networks are different in that they take advantage of low-, mid-and high-band spectrums for coverage and performance. This will require the deployment of small cells coupled with assistance from municipal government agencies for issuing siting permission and licences. The already cumbersome approach might get further delayed.

More innovative use cases to emerge in the medium term, enabling superior returns for telcos.

• Consider a 5G Ultra Reliable Low Latency Communications (URLLC) scenario, if surgery and health monitoring can be carried out remotely, doctors would not need to physically meet their patients.

Bharti’s stock price has recovered sharply in view of its improved fundamentals.

• Bharti’s stock price rose ~25% to Rs510 from Rs410 on 24 March as investors re-focused on its sharp EBITDA growth in FY21F (March YE). The street projects a 24% rise in FY21F EBITDA to INR360bn (~S$6.8bn)- rising by ~INR100bn (~S$1.9bn) in absolute terms. This is on the back of 20-40% tariff rise effected in Dec 2019 by the three players – Bharti, Reliance Jio and Vodafone-Idea Limited.

Bharti might provide S$400m uplift to Singtel’s FY21F earnings (~18% of Singtel’s earnings) compared to FY20F.

• The street projects Bharti to turn around from losses to a profit of INR27bn (S$510m) in FY21F – rising by INR64bn (S$1.2bn) from its net loss position in FY20F. Since SingTel holds a ~33% stake in Bharti, we project Bharti’s contribution to SingTel to rise by S$400m in FY21F.

Adjusted gross revenue (AGR) dues outcome is unknown but a relief is quite likely to prevent Vodafone-Idea’s bankruptcy.

• Bharti has already paid 41% of its dues - INR180bn (S$3.4bn) out of INR440bn (S$8.3bn) but Vodafone-Idea has only paid 12% of its dues amounting to INR69bn (S$1.3bn) out of INR583bn (S$11.0bn). Highly geared Vodafone-Idea, with net debt-to-EBITDA above 7x, might go into bankruptcy if there is no AGR relief.
• Vodafone-Idea’s bankruptcy might have a ripple effect on an already-fragile Indian banking sector leading to a sharp slowdown in the Indian economy. As such, we are expecting some relief to Vodafone-Idea (and hence others) in the form of longer duration of 20 years to pay the AGR dues.

Bharti’s operational turnaround in 4Q20F may be masked by fair value losses on its foreign debt.

• The street projects 5% q-o-q rise in Bharti’s 4Q20F revenue to INR229.4bn and 4% q-o-q rise in EBITDA to INR101.2bn. Most importantly, Bharti may reach breakeven in 4Q19 compared to INR10.8bn loss (S$210m) in 3Q20.
• However, Bharti carries 28-30% of its INR1,100bn (S$20.7bn) debt in foreign currencies and given the 6-7% weakening of INR vs USD over the last three months, we estimate that Bharti may experience INR20bn (S$377m) in fair value losses and SingTel (33% stake in Bharti) may accrue S$130m of fair value losses from Bharti. This may wipe out the gains from Bharti’s operational turnaround.
• See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2020-04-17

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