SingTel - UOB Kay Hian 2022-10-07: Optus Security Breach Affects Near-Term Profitability, Buy On Weakness

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SingTel - Optus Security Breach Affects Near-Term Profitability, Buy On Weakness

  • Our earnings sensitivity suggests an 11% and 3% earnings impact in SingTel (SGX:Z74)'s FY23-24F as a result of the Optus data security breach.
  • SingTel's Share Price has corrected 6% in the past month, and we think that this has partly factored in the negative newsflow.
  • We advocate a BUY for SingTel on weakness with an unchanged DCF-based target price. We continue to like SingTel as management strives for high single-digit ROIC by FY25 (FY22: 5%).

Optus: Personal data compromised.

  • Optus had a data security breach whereby 9.8m of its customers (~96% of subscribers) had personal data stolen and compromised by hackers. Out of the 9.8m customers, 1.2m customers had at least one valid and current form of identification document (ID) stolen along with other personal information such as email addresses, Medicare card numbers and date of births.
  • Optus has notified these customers and recommended that they replace their IDs to prevent any identity theft. 900k customers had numbers from expired IDs stolen, with next steps being discussed with authorities. The remaining 7.7m customers had no valid or current ID stolen but had other personal information compromised.

Mounting costs for SingTel

  • Under Australia’s Privacy Act, the maximum penalty that Optus faces is around A$2.2m. For customers that had their identification numbers exposed, Optus has offered to pay for a 12-month subscription (A$15/month) to credit monitoring service Equifax, which could cost Optus A$189m. We reckon this pertains to the 2.1m customers who had IDs stolen as these customers have the highest risks of material losses from fraudulent loans and identity fraud.
  • Facing calls to bear the replacement costs for affected customers, Optus has also agreed to bear passport replacement costs (A$193/passport) for affected customers. For driver’s licenses, various state governments have stated that Optus would bear the replacement costs as well.
  • Analysing the impact on SingTel.
    1. Under Australia’s Privacy Act, the maximum penalty that Optus could face is around A$2.2m. That said, we are of the view that Optus would not be paying any fines under the Privacy Act, given that a recent hack of Canva, a unicorn in Australia, compromised the personal information of 137m users but resulted in insignificant or even zero fines by the Australian government.
    2. For Equifax, we estimate that 50% of the 2.1m customers whose identification documents were compromised would take up the 12-month subscription. At A$15/month over a year, this would lead to total costs of A$79m for FY23 and A$110m FY24F respectively. Our bear case assumes that all of the 2.1m customers sign up for the subscription, leading to total costs of A$126m for FY23F and A$176m for FY24F.
    3. At a cost of AS$193/passport replacement, this cost would make up the largest portion of the total costs. It is expected that almost all of the 1.2m customers with identification numbers compromised would replace their passports. As there has been no confirmation on actions needed for the remaining 900k customers who had expired identification documents, we are assuming that a significant portion of this group would also have to change their passports given that Australian citizens are allowed to apply for loans with expired passports within the preceding two years based on Australia’s 100 point identification check system. We estimate that 70% of the 2.1m customers would change their passports at a total cost of A$284m, with our bear case being 100% of the 2.1m customers at a total cost of A$365m.
    4. Similarly, for driver’s licenses (A$11.5-82.1/replacement), Australian citizens are also able to apply for loans with their driver’s licenses along with other documents, albeit less powerful as expired driver’s licenses are not accepted. At an average cost of A$30/replacement, we estimate that 70% of the 2.1m customers would change their driver’s license at a total cost of A$44m, with our bear case being 100% of the 2.1m customers at a total cost of A$57m.

Worst-case scenario of 17% drop in SingTel's FY23 earnings.

  • Our base case sees an 11% and 3% drop in SingTel's FY23 and FY24 net profit respectively. Worst-case scenario suggests a 17% and 6% drop in earnings respectively.
  • Expected aftershock. Following the data security breach, we opine that there may be a loss in confidence for Optus mobile services, with a small exodus of mobile customers to other competitors. Assuming a 2ppt loss in net adds growth for Optus from our current FY23 estimates, SingTel’s FY23F revenue and PATMI would drop by 0.2% and 0.3% respectively.

SingTel - Earnings forecast revision and recommendation

Chong Lee Len UOB Kay Hian Research | Llelleythan Tan UOB Kay Hian | https://research.uobkayhian.com/ 2022-10-07
SGX Stock Analyst Report BUY MAINTAIN BUY 2.900 SAME 2.900