SingTel - UOB Kay Hian 2020-04-03: A Defensive Bet, Connectivity Is Deemed Essential Amid COVID-19 Outbreak; Upgrade To BUY

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SINGTEL (SGX:Z74)

SingTel - A Defensive Bet, Connectivity Is Deemed Essential Amid COVID-19 Outbreak; Upgrade To BUY

• We see emerging value as SingTel Share Price has fallen 22% ytd and yield spread has widened to 550bp.
• Importantly, telco earnings are resilient and the stock offers an attractive dividend yield of 6.7%.
• We take the view that 5G and non-essential capex will be deferred and this will pave the way for management to sustain a 17.5 S cents DPS for FY21.
• We trim FY21-22 net profit forecasts by 5-6% to account for a 6% depreciation of the A$/S$.
• We upgrade the stock from HOLD to BUY, underpinned by its resilient earnings and attractive valuations.

Upgrade to BUY; resilient earnings base.

• SingTel Share Price has fallen 22% ytd and currently trades at 2SD below its 5-year mean EV/EBITDA of 13x.
• Historically, SingTel has fallen between 20% (SARS) and 40% (Asian Financial Crisis and Global Financial Crisis) but would outperform the STI in the following six-month period.
• Importantly, the yield spread (dividend yield vs 10-year bond) has widened to 550bp, by far the widest in the past five years.
• Upgrade SingTel (SGX:Z74) to BUY with a marginally lower DCF-based target price.

Limited impact from COVID-19, data usage has risen by 10-15%.

• The COVID-19 induced lockdown is expected to have a minimal impact on SingTel’s earnings.
  • For one, limited travel restrictions will lead to lower roaming charges but this is limited to 2-5% of service revenue.
  • Second, the prepaid markets will experience physical distribution channel disruptions (due to lockdown measures) but this will be partly mitigated by the digital deliveries. Over the years, SingTel and its opcos have invested in digitisation efforts to deliver cost savings.
  • Lastly, we gathered that data traffic has increased 10-15% since the start of countries lock-down.
• In these difficult times, our base case assumes SingTel will not actively monetise data growth but rather, undertake CSR to win over customers in the longer run via free off-peak data or selective data usage - ie school or social media applications. This will help boost customer stickiness and reduce churn rates in the longer run.

Potential capex deferment, Singtel may be able to sustain 17.5 S cents DPS.

• We take the view that 5G capex may be put on hold as countries grapple to conserve cashflow in the next 6 months. As such, we have pencilled in a deferment of 5G and non-essential capex (eg additional fibre routs for resiliency purposes) by 6 months and lowered our FY21 capex projection to mimic FY20's S$2.1b maintenance capex (previously S$2.5b). This may pave the way for SingTel to sustain a 17.5 S cents DPS for FY21, we opine.

TPG finally launches 50GB data for a S$10/month prepaid plan.

• After a long wait, TPG is offering 50GB of data for S$10/month. This will include 300 call minutes and 30 SMSes. In addition, subscribers will be entitled to 1GB of roaming data in selected countries. Boasting 400,000 non-paying subscribers as of Feb 20, TPG announced that they have 99.9% outdoor coverage and are currently working on tunnel and MRT coverage.
• From hereon, we expect:
  1. customer churn to be high – as some may prefer to shift to telco incumbents with better coverage, and
  2. market competition to have peaked.
• With that, telcos and mobile network virtual operators (MVNOs) will likely compete on customer service, innovative product offering and point of sales. We however, do not expect ARPU uplift anytime in the next six months.

Singtel is better sheltered given its diversified earrings base.

• We have factored in 20% and 15% declines in prepaid APRU for Singtel over FY21-22 and we believe the telco market has been on a downtrend in the past two years with the entry of MVNOs and is unlikely to de-rate further due to TPG’s announcement.
• By end FY21-22, SingTel prepaid ARPUs are estimated at S$13/month and S$12/month.
• We do not believe SingTel will push prices down to match TPG’s attractive pricing as the latter’s indoor coverage remains limited. Nevertheless, SingTel’s diversified earnings base would suggest that a further cut in prepaid ARPUs (to S$10/month) will only dent FY21F EPS by 0.6%, a minimal impact to bottom line.

Trim FY21-22 net profit forecasts by 6% and 5%

• Trim FY21-22 net profit forecasts by 6% and 5% respectively as we factor in:
  1. a 6% depreciation of the A$/S$ in 1Q20 – for Optus, and
  2. additional S$20m loss at Bharti at the associate level, following the news that the group has pledged S$18m to fight the COVID-19 situation in India.

Cashflow resilience paves the way for attractive dividend yield of 6.7%.

• Deferment of 5G and non-essential capex will allow SingTel to accommodate a 17.5 S cent DPS for FY21. Earnings base is resilient in the face of an economic downturn, albeit pedestrian earnings of only 2.5% at a 3-year earnings CAGR over FY20-22.
• We raised our DPS from 16.5 S cents for FY21 to 17.5 S cents, based on the assumption that the 5G investment cycle will be deferred by at least 6 months. This translates to an attractive net dividend yield of 6.7%.
• See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.
• Management reiterated its stance of balancing shareholders’ returns and maintaining its investment grade rating for funding cost purposes.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2020-04-03

SGX Stock Analyst Report BUY UPGRADE HOLD 3.00 DOWN 3.200