SingTel - UOB Kay Hian 2020-07-28: Nascent Recovery In 2HFY21 With The Reopening Of Economies

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

SingTel - Nascent Recovery In 2HFY21 With The Reopening Of Economies

  • We expect a weak 1HFY21 amid higher bad debt provision due to COVID-19 uncertainties. That said, the re-opening of economies across regional markets will allow for an earnings recovery in 2HFY21. Against the backdrop of upcoming 5G capex, SingTel (SGX:Z74) will focus on cash conservation and the introduction of scrip shares for FY21.
  • In the longer run, the 5G roll-out (from Jan 21) will provide monetisation opportunities for the Singapore consumer segment.
  • Maintain BUY on share price weakness with a DCF-based target price of S$2.80.

SingTel's FY21 outlook: Nascent recovery seen in 2HFY21...

  • In essence, the COVID-19 pandemic has resulted in lower roaming, prepaid, and handsets revenues for Singtel’s consumer segment. In addition, corporates’ and advertisers’ cutbacks have adversely impacted the enterprise segment. As such, we expect the full impact of the COVID-19 lockdown in 1QFY21 and higher bad debt provisions for the quarter.
  • We expect SingTel to focus on good cost containment in 1HFY21 in lieu of weak top-line trends.

…with enterprise digitisation and 5G deployment in the limelight.

  • Positively, recovery trends are encouraging across SingTel’s operating companies (opcos) in light of the re-opening of economies and resumption of customer’s acquisition activities. We expect earnings to play catch up in 2HFY21 and SingTel will thematically benefit from the re-opening of economies.
  • In the longer run, SingTel is expected to benefit from strong demand from enterprise customers for cyber security services, cloud applications, and business digitisation solutions as a result of accelerating technological adoption. We expect the Info-Communications Technology (ICT) division (accounts for 50% of enterprise revenue) to gain traction in FY21 as SingTel replenishes its orderbook (4QFY20: +8% y-o-y).

Prioritising cashflow managment in FY21...

  • Against a backdrop of upcoming 5G capex for Singapore, we expect SingTel to focus on cash conservation and liquidity in the near term. Capex intensity is expected to spike up to 14% and 16% for FY21-22 (FY20: 12%) as SingTel rolls out 5G coverage in Singapore (50% population coverage by 2022 and nationwide by 2025).

… as Singtel explores a scrip issue.

  • While FY21’s free cashflow of S$3.8b can sustain a 12.25 S cent (c.80% payout) net DPS, we gathered that SingTel is proposing a share scrip scheme for FY21-22. This will give investors the option to receive dividends in cash or stock. Based on a 12.25 S cent net DPS, SingTel offers a 4.9% dividend yield – a spread of 400bp against SIBOR. See SingTel Dividend History.

5G: Limited wholesale pricing erosion...

  • Essentially, non-5G licensed mobile network operators (MNO) and mobile virtual network operators (MVNOs) would have access to the nationwide 5G networks via a wholesale arrangement with the 5G licensees - SingTel or Starhub-M1. We gathered that there is no mandatory pricing regime by the regulator for wholesaling 5G networks at this juncture. This will help to preserve the business case for the incumbent’s 5G capex plan and competitive advantage in the longer run.

… potential monetisation over the long term.

  • We believe the growing demand for high speed internet on streaming, live gaming and the new norm of working from home could drive higher take-up for 5G services in the longer run. This is evidenced in South Korea where 5G subscribers reached 6.3m (10% of total mobile subscribers), with all telcos reporting an average 5% y-o-y increase in 1Q20 service revenue and ARPU (blended) uplift of 1-2% y-o-y since the launch of 5G services, despite the COVID-19 outbreak.

SingTel's valuation

  • No change to SingTel's earnings forecast. See summary on the outlook for key divisions of SingTel in PDF report attached below.
  • Maintain BUY on SingTel with a DCF-based target price of $2.80 (discount rate: 7%, growth rate: 1.5%), implying 14.5x FY21F EV/EBITDA (1SD above its 5-year mean EV/EBITDA of 13.5x). SingTel is investing in 5G technology as a longer-term strategy.
  • See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.
  • Key catalysts for the stock include:
    1. monetisation of regional 5G footprint,
    2. faster-than-expected recovery in Optus’ consumer and enterprise businesses,
    3. narrowed losses from Bharti Airtel due to improving market pricing and rational competition, and
    4. Australia tower sales (Management has confirmed the tower sales deal in Australia is ongoing and deems the asset monetisation value-accretive to shareholders).
  • SingTel has adpoted half yearly financial reporting and its 1QFY21 business update should be out in mid-Aug. See 1H2020 Earnings Schedule for STI Constituents.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2020-07-28
SGX Stock Analyst Report BUY MAINTAIN BUY 2.800 SAME 2.800