SingTel - CGS-CIMB Research 2020-05-15: 4QFY20F Lesser Drag From Bharti

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SINGTEL (SGX:Z74)

SingTel - 4QFY20F Lesser Drag From Bharti

• SingTel's 4QFY20F core net profit could be S$620m-640m (-8% to -11% y-o-y), which is largely in line with our but slightly below consensus forecasts.
• Singapore and Optus earnings may fall y-o-y, but partly cushioned by smaller negative contribution from Bharti.
• Reiterate ADD with an unchanged SOP-based target price of S$3.40.

SingTel's 4QFY3/20F core net profit likely eased y-o-y, but grew q-o-q

• SingTel (SGX:Z74) will release its 4QFY3/20 results on 28 May. We forecast 4QFY20F core net profit of S$620m-640m, or 8-11% lower y-o-y, mainly due to Optus and Singapore. q-o-q, we believe earnings rose 13-16% due to improvements at Bharti, Globe and Optus.
• FY20F core net profit may be largely in line with our estimate but miss Bloomberg consensus' by 5-7%. We note that the latter has been cut by 9% vs. 3 months ago and is now closer to our forecast.
• We expect SingTel to pay final DPS of 10.7 Scts, as per its FY20 guidance. See SingTel Dividend History.

Singapore & Optus earnings to remain soft y-o-y

• We believe Singapore’s 4QFY20F core net profit fell 20-26% y-o-y (down 28-33% q-o-q) due to
  1. weaker mobile revenue (intense competition, plus lower roaming and device sales exacerbated by Covid-19),
  2. enterprise EBITDA margin erosion (lower contract value on renewal), and
  3. higher depreciation.
• We see 32-36% y-o-y lower Optus core net profit due to lower enterprise EBITDA (lower revenue and margin), higher depreciation, and 5.6% weaker A$ vs. S$. q-o-q, 4Q core net profit likely rose 7-15% on seasonally lower costs.

Associate earnings likely up y-o-y & q-o-q on narrower Bharti losses

• Associate contributions in S$ terms likely grew 18-21% y-o-y in 4QFY20F, led by smaller share of Bharti losses at S$10m-15m (4QFY19: -S$98m), based on consensus forecasts. This would be partly offset by lower contributions from AIS, NetLink Trust (SGX:CJLU), Telkomsel, and Intouch. q-o-q, associate profits may climb 32-36%, on smaller share of Bharti losses and higher Globe earnings, partly offset by lower NetLink Trust contribution.

Dividend outlook for FY21F

• While we estimate net debt/group EBITDA will stay under 2x by end-FY21/22F, we concede there is a risk of SingTel cutting its FY21F DPS from 17.5 Scts. Two key factors which may sway SingTel’s decision are:
  1. its medium-term earnings outlook (which may now be viewed structurally lower vs. when it first committed to a 17.5 Scts DPS for FY19- 20 to ride out short-term earnings volatility), and
  2. oncoming 5G capex.
• SingTel's FY21F DPS may be cut to
  1. 14-15 Scts, if based on FY21-22F FCF; or
  2. 12.8 Scts (75% payout), if it reverts to its payout policy of 60-75% of underlying net profit.

Reiterate ADD; SOP-based target price retained at S$3.40

• SingTel’s FY3/21F EV/OpFCF of 14.7x is in line with the ASEAN telco average but at a 5% discount to or 0.4 s.d. below its 12-year mean (low: 10.7x in Oct 2008). If FY21F DPS is cut to 12.8-15.0 Scts, the yield is still decent at 4.8-5.6%.
• See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.
• Potential re-rating catalyst: earnings recovery in FY21F.
• Downside risk: keener competition in its markets.

FOONG Choong Chen CGS-CIMB Research | Sherman LAM Hsien Jin CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-15

SGX Stock Analyst Report ADD MAINTAIN ADD 3.400 SAME 3.400