SingTel 1Q21F Business Update Preview - DBS Research 2020-08-04: Expect Underlying Net Profit Of S$529m

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

SingTel 1Q21F Business Update Preview - Expect Underlying Net Profit Of S$529m

  • We expect SingTel to report 1Q21F (April 2020 to June 2020) underlying net profit of S$529m (-11% q-o-q, -8% y-o-y), on 7 Aug. This will likely meet consensus estimates; its weak Australia earnings to be offset by a resurgent Bharti.
  • Holding company discount at SingTel is quite high at 33% vs. historical average of 16%; near term catalyst in place.
  • BUY at revised Target Price of S$3.04; Bharti & Telkomsel comprise 35% & 25% of SingTel’s valuation respectively.

We expect SingTel to report underlying net profit of S$529m in 1Q21F.

  • We estimate that SingTel (SGX:Z74) will report 1Q21F (April 2020 to June 2020) underlying net profit of S$529m (-11% q-o-q, -8% y-o-y), largely due to continued weaknesses in Australian and Singapore businesses.
  • Contributions from Australia to the Group’s bottom line is likely to be affected by the sharp sequential decline of National broadband Network (NBN) migration fee, coupled with roaming weakness, partly offset by lower handset losses.
  • Contributions from home turf is unlikely to see fair weather either as both roaming and pre-paid revenues will continue to be suppressed by travel restrictions. Enterprise revenues too are likely to suffer from projects getting postponed amidst COVID-19.

Lower losses from Bharti may help mitigate seasonally weaker results from Globe and Telkomsel.

  • Contributions from associates are likely to remain stable given reduction in losses from Bharti will offset potentially weak results from Globe and Telkomsel. We expect stable contribution from associates of S$404m (+1% q-o-q, +48% y-o-y) over 1Q21F primarily driven by;
    1. S$24m sequential reduction in losses from Bharti with it contributing S$17m in losses,
    2. sequential S$15m reduction in Globe’s earnings with S$69m earnings contribution, and
    3. flattish contribution of S$243m from Telkomsel which constitutes ~60% of total associate contributions to SingTel.
  • Bharti’s operational performance is maintaining the upward momentum with the telco’s average revenue per use (ARPU) in 1Q20 improving to INR157 from INR154 in 4Q20 due to a sharp tariff hike in Dec 2019. Globe’s results are expected to decline in 1Q20F from the spike in results experienced in 4Q20.
  • We expect Globe to contribute S$69m (-18% q-o-q, +4.4% y-o-y) in 1Q21F.
  • Telkomsel’s contributions are likely to remain largely flattish due to continued competitive pressure from XL Axiata and Indosat which are vying for revenue market share gains in ex-Java territories.

SingTel plans to divest its telco towers in Australia which are worth ~S$1.6-1.7bn (10-11 Scts per share).

  • SingTel has acknowledged that plans are underway for a sale and leaseback of Optus’s towers. Optus has over 2,500 towers spread across over 1,000 regional towns as per the telco’s website. These towers are reportedly worth A$2bn or ~S$1.7bn.
  • The funds from the deal are expected to be utilised to improve Optus’s 4G regional coverage and to fund its 5G network rollout without further burdening the balance sheet. However, one of the potential risks of a sale and leaseback is the possibility of opening the towers to external tenants such as Vodafone Hutchison Australia or TPG.

We value SingTel’s data centre business at S$2.0bn or 12 Scts per share.

  • Pure-play data centre (DC) operators fetch an average EV/EBITDA valuation of ~20x while telcos fetch a valuation of ~7x, suggesting 60-70% undervaluation of DC assets held by telcos. Pure-play DC operators tend to structure their business in the form of real estate investment trusts (REITs), yielding tax efficiencies and higher distributions for its owners. This creates a natural premium due to higher cash flow transparency boosting the market value.
  • As evident from US telcos Verizon and Century Link divesting their data centre businesses, telcos are better off divesting their data centre business at much higher multiples than their core businesses to book significant gains.
  • In terms of gross leasable area (GLA), we estimate that its portfolio stands at over 1.5m sf worldwide based on available data. Assuming 45% utilisation (generally ranges from 30-50%) and mid-point psf (Hong Kong and Singapore: S$3,700 psf, Australia: S$2,400 psf) established from peer comparison, we value ST’s portfolio at S$2.0bn.

We value SingTel’s digital businesses, comprising Cyber-Security and Digital Life at S$2.4bn or 14 Scts per share.

  • The Cyber-Security segment is valued at S$818m, based on enterprise value/revenue (EV/revenue) of 1.3x, pegged to a 20% discount to peer average to account for the lack of profitability of SingTel’s cyber-security operations. The Digital Life segment, which largely comprises the Ad-Tech firm Amobee group, has been valued at an EV/Revenue of 1.05x, at a 30% discount to the average valuations of recent acquisitions in the Ad-Tech space.

We expect the stock to re-rate to 4.5% yield (from 4.9%) as asset-divestment might unlock the trapped value.

  • SingTel’s investment in its associates is worth S$2.57 per share based on their market value, implying that its core business in Singapore and Australia is trading at a negative value of -9Scts per share.
  • We value the profitable core business at 73 Scts per share and the catalyst for the re-rating should be the potential divestment of Australia towers (worth 10-11 Scts per share) in FY21F, followed by other divestments worth 26 Scts per share over the next 1-2 years.
  • We expect SingTel to re-rate to 4.5% yield (15- year historic average) in a low-interest environment. In our view, FY21F projected dividend per share (DPS) of 12.25 Scts at 75- 80% payout ratio is sustainable in the long term.
  • See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.

Where we differ: consensus earnings, after being sharply cut, are in line with our numbers now.

  • We expect National Broadband Network (NBN) fee in Australia to drop by ~A$300m in FY21F/22F each which should be more than offset by over S$500m rise in Bharti’s pre-tax earnings contribution in FY21F/22F each.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2020-08-04
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