SingTel - UOB Kay Hian 2020-05-29: 4QFY20 In Line, Weak 1QFY21 Outlook To Be Offset By Long-Term Opportunities

SINGTEL (SGX:Z74)

SingTel - 4QFY20 In Line, Weak 1QFY21 Outlook To Be Offset By Long-Term Opportunities

SingTel's 4QFY20 core net profit fell 15% y-o-y to S$594m (+8% q-o-q) amid lower roaming revenue, lower handset sales, a weaker AUD and higher depreciation charges. These were offset by narrowed Airtel losses as associate earnings surged 24% y-o-y.
SingTel's FY20 core net profit of S$2,457m (-13% y-o-y) is in line with our expectation but we cut our FY21-22 net profit forecasts by 14%/9% to account for the weak 1QFY21 outlook.

Maintain BUY but cut DCF-based target price to S$2.80, in tandem with the earnings forecast downgrade.

SingTel (SGX:Z74) reported a 4QFY20 core net profit of S$594m (-15% y-o-y, +8% q-o-q). This reflects:
1. a 10% decline in top-line amid lower mobile service revenue and equipment sales,
2. 6% depreciation of the Australian dollar, and
3. higher depreciation charges.
The sequential gain was due to higher regional associate PBT, given the narrowed Airtel losses. All in all, FY20 core net profit (excluding S$1.8b share of Airtel regulatory cost provision) came in at S$2,457m (-13% y-o-y), within expectations.

SingTel declared a final net DPS to 12.25 S cents. This translates to a 81% net elow our forecast of 17.5 S cents.

Cost savings for FY20 amounted to S$444m, thanks to SingTel’s efforts to lower content cost through renegotiations and a lean cost structure via the digitisation initiatives. These were partly offset by lower handset sales in the quarter and enterprise margin compression.

Some non-essential capex will be deferred, while no 5G capex is expected in 2020. Capex intensity is not expected to spike up as telcos have been given enough time to roll-out 5G (50% population coverage by 2022 and nationwide by 2025) developments.
SingTel is already in discussions with major vendors for 5G equipment procurements; a further commentary will be announced once the Infocomm Media Development Authority (IMDA) outlines the 5G licence details in end-Jun 20.

SingTel withdrew its FY21 guidance in view of Covid-19 induced uncertainties. We expect consumer weakness to be reflected in 1QFY21 alongside pockets of cutbacks to enterprise business revenue.

Cut SingTel's FY21-22 earnings forecasts by 14% and 9% respectively to account for the challenging outlook in 1QFY21- induced by the Covid-19 outbreak. Our new forecasts reflect:
1. weaker prepaid revenue,
2. lower equipment sales, and
3. cutbacks in enterprise and advertising revenue streams.
However, partial support is expected to come from an improving Airtel performance as management alluded to potential market repair in India.
Cut SingTel's FY21 DPS to 12.25 S cents, based on 80% net profit payout. Management will focus on preserving cash amid global uncertainties and prepare to invest in 5G from FY22 onwards. As a result, we cut FY21-22 net DPS to 12.25 S cents and 13.95 S cents respectively (~80% payout). See SingTel Dividend History.

Maintain BUY on SingTel with a marginally lower DCF-based target price of $2.80 (discount rate: 7.10%, growth rate: 1%). At our target price, the stock will trade at 14.5x FY21F EV/EBITDA, 1SD above its 5-year mean EV/EBITDA of 13.5x.
Key re-rating catalysts for SingTel includes:
1. monetisation of 5G footprint,
2. higher net DPS for FY21,
3. faster-than-expected recovery in Optus’ consumer and enterprise business, and
4. market repair in Singapore.
See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.
Management has confirmed the tower sales deal in Australia is ongoing and deems the asset monetisation value-accretive to shareholders.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-29

SGX Stock Analyst Report BUY MAINTAIN BUY 2.80 DOWN 3.000