SingTel - DBS Research 2020-05-21: Cheap Proxy To Bharti At 36% Holding Company Discount

SINGTEL (SGX:Z74) | SGinvestors.io SINGTEL (SGX:Z74)

SingTel - Cheap Proxy To Bharti At 36% Holding Company Discount

  • SingTel's 4Q20F underlying profit of S$518m (-6% q-o-q, -26% y-o-y) on 28 May is likely to match consensus estimate of S$500m.
  • Holding company (HoldCo) discount at SingTel has widened to an all-time high of 36% vs 16% historical average.
  • Maintain BUY with a higher Target Price of S$3.22; Bharti comprises 38% (prev 32%) of SingTel’s valuation.

SingTel 4Q20F Earnings Preview

  • We expect SingTel (SGX:Z74)'s underlying net profit in 4Q20F to easily met consensus estimates. We estimate SingTel to report 4Q20F underlying net profit of S$518m (-6% q-o-q, -26% y-o-y) to meet consensus estimate of S$500m. This should be driven by improvements in associates backed by lower losses from Bharti and earnings recovery Globe. This should offset some of the weakness in Australia and Singapore.
  • Australia might report a big drop in profit due to sharp sequential drop of over A$80m in National broadband Network (NBN) migration fee.

Improvement in associates led by reduction in losses from Bharti and a rebounding Globe.

  • We expect an improvement of S$57m sequentially to S$351m in underlying earnings of associates over 4Q20F primarily driven by;
    • S$46m sequential reduction in losses from Bharti with it contributing S$47m loss in 4Q20F and
    • sequential S$27m rise in Globe earnings with S$85m earnings contribution in 4Q20F.
  • Both Bharti and Globe have reported their results already.
    • Bharti’s operational performance is on an upward trajectory with the telco’s average revenue per use (ARPU) in 4Q20 improving to INR154 up 14% q-o-q due to sharp tariff hike in Dec 2019.
    • Globe’s results picked up during 4Q20F, following a slump in the previous quarter due to rise in marketing, subsidy and provision-related costs. Globe should contribute S$85m (+47% q-o-q, +4.0% q-o-q) in 4Q20F based on its last set of results.
  • Telkomsel, SingTel’s largest contributor to associate profit is likely to reported S$5-10m sequential drop in its post-tax profit to S$205m-210m.
  • The decline in Telkomsel’s contributions is due to continued competitive pressure from XL Axiata and Indosat which are vying for revenue market share gains in ex-Java territories.

With 5.6% dividend yield, mid-single-digit growth is a bonus in the current environment.

  • Despite COVID-19 expected to linger throughout 2020, we project SingTel to record compounded annual earnings growth (CAGR) of 6% over FY20F-22F on the back of potential turnaround of its associate Bharti Airtel (Bharti). With Bharti’s share price up 32% year-to-date (ytd) vs. SingTel's share price down 20% ytd, HoldCo discount at SingTel has widened to a 5-year high of 36% vs 16% historical average.
  • We project a 15-Sct DPS in FY21F (vs 17.5Scts DPS in FY20F) due to weak Australia, implying an attractive 5.6% yield near its +2-standard deviation (SD) yield. See SingTel Dividend History.
  • We expect the stock to trade near +1SD yield of 5.1% (vs historic average of 4.5% over the last 15-years) coupled with 6% earnings CAGR.

Where we differ:

A look at SingTel's listed history – what drives its share price?

  • See appendix1 in attached PDF report for details.
  • See also SingTel's sum-of-the-parts valuation details in attached PDF report.

  • (Note: In SingTel's Announcement dated 19-Mar, it states "Airtel has recognised an amount of Rs. 56.4 billion (S$1.1 billion) as an exceptional charge on account of reassessment of regulatory cost based on a recent judgement on one time spectrum charge related matter. SingTel will recognise its share of the above provision, amounting to S$357 million (S$232 million on posttax basis), as an exceptional item in its financial results for the quarter and financial year ended 31 March 2020, which is scheduled to be announced on 28 May 2020.")

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2020-05-21
SGX Stock Analyst Report BUY MAINTAIN BUY 3.020 UP 3.220