SingTel - UOB Kay Hian 2022-02-14: On Track To Deliver Growth For Shareholders

SINGTEL (SGX:Z74)

SingTel - On Track To Deliver Growth For Shareholders

SingTel's 9MFY22 results may mirror 1HFY22’s mid-teen y-o-y growth. The quarter will be characterised by positive postpaid momentum in Singapore, a good run for Optus and narrowed digital losses. 3QFY22 will see the return of roaming revenue, albeit it still being early days.
Separately, data centre development in Thailand is underway as SingTel aims to hold 170MW of data centre capacity in the next 3-5 years (at a valuation of S$7b- 8b).
Maintain BUY on share price weakness with a DCF-based target price of S$2.75.

We expect SingTel (SGX:Z74) to report a 15- 20% y-o-y increase in 9MFY22 earnings to S$982m, mirroring 1HFY22’s 17% y-o-y growth in net profit. 3QFY22 will be characterised by:
1. stronger postpaid revenue thanks to recovering roaming revenue and encouraging 5G take-up in Singapore,
2. continuous improvement in Optus’ performance, and
3. better performance in the digital business portfolio.
The sustainability of roaming revenue depends on the reopening of Southeast Asia’s international borders.
We expect the upcoming quarterly results to be partly offset by sequentially weaker associate earnings. For 3QFY22, contribution from SingTel's regional associates could be dragged down by lacklustre performance in India and the Philippines.
- In India, Bharti Airtel saw core earnings dropping 3% y-o-y and 27% q-o-q amid higher opex and finance cost. This was partly offset by a 6% q-o-q ARPU uplift after the recent tariff hike as well as stellar performance from Airtel Africa.
- Globe’s core earnings were weak (-25% y-o-y, - 42% q-o-q) amid soft service revenue growth, higher opex and depreciation.
- Positively, AIS in Thailand is experiencing a 10-15% ARPU uplift as 5G subscribers base grew to over 2.2m (5% of total subscribers) as of end-21.

We gather that SingTel currently has more than 1,000 standalone 5G sites across Singapore, and is on track to meet IMDA’s target of 50% population coverage by end-22. SingTel also notes encouraging 5G adoption via bundled packages. This has led to ARPU uplift (for 5G bundles) and helped address dilution from 4G SIM-only plans.
To recap, SingTel’s postpaid ARPU stabilised at S$28/month in 1HFY22 thanks to encouraging 5G bundled take-ups. Additionally, Singapore continues to exhibit rational competition within the prepaid segment with incumbent telcos gaining momentum in terms of subscriber growth. We expect GOMO to mirror GIGA’s positive subscriber growth trend.

On 3 Feb 22, SingTel executed a joint development agreement (JDA) with Gulf Energy and AIS to jointly develop and operate data centre(s) (DC) in Thailand. While the actual DC capacity remains in discussion, we note that SingTel aims to grow its regional DC capacity by ~70MW to reach a total capacity of ~170MW (in Singapore and the region) within the next 3-5 years.
The partnership with Gulf is seen as complementary to SingTel given Gulf’s power asset business (security of power supply being an integral part of data centre) and influence in the society.

Currently, SingTel has seven data centres in Singapore with 70MW capacity. It aims to add another 100MW of capacity to SingTel’s DC portfolio over next 3-5 years. This will create a DC asset value of S$7b-8b within five years. SingTel recently announced that they are building a 30MW integrated cable landing station and data centre in Singapore, with funding being currently worked out with potential investors.

We understand that the Trustwave business in North America is currently carved out and management is looking to divest it. Both assets have been de-emphasised following the write-down in Dec 21 (amounting to ~S$1b of impairment)

4Q21 core net profit up dropped 4% y-o-y but rose 8% q-o-q. q-o-q improvement was attributable to 2% increase in service revenue.
As of end-21, 5G subscriber base reached over 2.2m (higher than its target of 2.0m). This was driven by ADVANC’s strong acquisition strategy and demand for larger data volume.
AIS continued to see an ARPU uplift of ~10-15% for its 5G subs, with 5G offering additional services such as AR/VR services, and 5G cloud games.
TRUE and DTAC merger talk is deemed positive to AIS with less competition (from 3 key players to 2 key players).

Excluding the net exceptional charge (gain on tower sales), 3QFY22 core net profit at INR 8.3b (- 3% y-o-y, -27% q-o-q) on higher opex and finance cost.
3QFY22 revenue rose 13% y-o-y and 5% q-o-q, with mobile ARPU up 6% q-o-q from INR153 to INR163 in following the 20-25% tariff hike of its prepaid plans. Airtel guided that the full impact of revised mobile tariffs will be visible in 4QFY22.
Airtel Africa to see continuous stellar performance (3QFY22 revenue up 19% and core earnings up >100%) on regional growth and improved margin.
Google’s recent investment of US$1b is a strong validation of Airtel’s role in being a leading pioneer of India’s digital revolution.

4Q21 core net profit dropped 25% y-o-y and 42% q-o-q amid flat service revenue growth, higher opex and depreciation.
Service revenue growth was slowed due to soft data demand amid typhoon that affected many subscribers in the region.
Globe is in advanced discussions with ST Telemedia Global Data Centres (the fastest growing DC solutions providers) to form a JV to accelerate DC growth and market position in Philippines.

Telkomsel targets low single-digit revenue growth (2020: 1% y-o-y) and a stable EBITDA margin (2020:52.8%) for 2021. Our Indonesian analyst expects a 9% y-o-y net profit growth for 2021.
Mobile competition remains intense but is not worsening. Competition has shifted towards delivering quality products and services rather than offering low priced packages
Telkomsel is expected to benefit from its dominant position especially in ex-Java region, and favorable regulatory environment.
4Q21 results have yet to be released.

Maintain BUY call on SingTel with a DCF-based target price of S$2.75 (discount rate: 7%, growth rate: 1.5%). At our target price, SingTel will trade at 14.5x FY22F EV/EBITDA (slightly above its 5-year mean EV/EBITDA).
SingTel currently trades at its 5-year mean EV/EBITDA of 13x.
Key re-rating catalysts include:
1. successful monetisation of 5G,
2. faster-than-expected recovery in Optus’ consumer and enterprise businesses, and
3. market repair in Singapore and resumption of regional roaming revenue.
See

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2022-02-14

SGX Stock Analyst Report BUY MAINTAIN BUY 2.750 SAME 2.750