SingTel - UOB Kay Hian 2022-10-20: Reprieve From Mounting Costs From Optus

SINGTEL (SGX:Z74)

SingTel - Reprieve From Mounting Costs

Optus has clarified that 100,000-150,000 passport details were stolen during the data security breach. Following discussions with Australia’s federal government, Optus has announced that these affected customers do not need to change their passports, lowering the total expected replacement costs required, but Optus is still required to pay for driver’s licence replacements.
Based on these new developments, we estimate a smaller impact on SingTel (SGX:Z74)’s FY23 earnings.

Our estimate – based on recent developments, suggests a potential provision from SingTel amounting to around S$240m (7% earnings impact to our FY23 PATMI estimate). Our base case assumes a regulatory fine of A$2.2m, based on Australia’s existing Privacy Act law.

SingTel’s wholly-owned Australian subsidiary, Optus, has clarified that out of the 2.1m customers who had personal identification document (ID) details compromised during its 22 September data breach, around 100,000-150,000 passports and 43,000 Medicare card details were stolen. Other ID details that were stolen include Pensioner Card, Photo ID/Proof of Age Card and drivers’ licences. Refer to SingTel's announcements dated 22 Sept and 03 Oct 2022.

Following discussions with the federal government, Optus announced that affected customers, whose passport details (valid or expired) were stolen, do not need to have their passports replaced. However, despite valid/current passports being safe to use for international travel, passports (up to 3 years past expiry) have been blocked by the federal government for online credit checks. If affected customers want to replace their passports, Optus would bear the replacement costs under specific circumstances, which applies to customers with valid/current passports and not expired passports.
This is positive for SingTel as we previously expected 70% of the 2.1m customers affected (one current or expired form of ID stolen) require a change in passports, accounting for around 70% of the total expected reimbursement costs.
With this new development, we expect total passport replacement costs to drop sharply by A$260m-310m to A$22m-34m for FY23, estimating that 100,000-120,000 (1.4m previously) customers would change their passports. As such, earnings impacts to our FY23-24 estimates for SingTel are 4% and 3% respectively (significantly lower than our previous estimates of 11% and 3%).

Optus is required to reimburse for drivers licence replacements which cost A$29.00-42.60 depending on the state agency. However, some state governments such as Western Australia and South Australia have decided to waive the replacement costs. It is still uncertain whether these state governments would request Optus to foot the final bill but if fully waived, would help negate some of the expected total costs (A$44m-57m).
Medicare card replacements are free of charge while Optus is still offering affected customers a 12-month (A$15/month) free subscription of Equifax Protect (FY23: A$79m, FY24: A$110m)

We understand churn spiked in the first two weeks after the data breach incident. Since then, customer churn have normalised to pre-incident levels.
Moving forward, we expect net adds to slow down in subsequent quarters as Optus recovers from this incident. Assuming a 2ppt loss in net adds growth for Optus from our current FY23 estimates, SingTel’s FY23 revenue and PATMI would drop by 0.2% and 0.3% respectively. Refer to the summary table in the report attached below.

In our view, dividends for 1HFY23 are unlikely to be affected as SingTel has ample proceeds from its asset recycling programme to absorb these costs (S$5b earmarked from stake sale of Bharti, Optus tower, monetisation of Singtel HQ), protecting its ability to pay sustainable dividends.
See SingTel's dividend history. Armed with strong core operating cash flows, we maintain our expectations of a 70-75% payout ratio by SingTel for 1HFY23, as compared with its dividend policy of 60-80% of underlying net profit.

No changes to our earnings forecast for SingTel.
Despite Optus’ near-term setbacks, SingTel’s other business segments are facing strong tailwinds as economic activity continues to ramp up, driven by the removal of most COVID-19 measures in key regional markets. Excluding Amobee’s contributions, we expect SingTel's 1HFY23 underlying its regional associates.
With the Singapore dollar appreciating against most of the regional currencies in 2QFY23, profit contributions from SingTel’s associates and Optus may face erosion. We have not adjusted our earnings estimates but would do so upon furthering tightening by MAS.
As most of SingTel’s associates are predominantly prepaid markets, the risk of a drawn-out recession along with high inflation may increase churn rates.
See
At our target price, SingTel will trade at 13x FY23 EV/EBITDA (its 5-year mean EV/EBITDA).
Since the data breach was disclosed on 22 Sep 22, SingTel's share price has fallen around 7%. We reckon that the negatives from this data breach have already been priced in or even overdone, leaving ample upside from current price levels.
Key re-rating catalysts for SingTel include:
- successful monetisation of 5G,
- monetisation of data centres and/or NCS, and
- market repair in Singapore and resumption of regional roaming revenue.
With a decent yield of 4.7% for FY23, SingTel remains an attractive play against elevated market volatility, underpinned by improving near-to medium-term fundamentals.

Chong Lee Len UOB Kay Hian Research | Llelleythan Tan UOB Kay Hian | https://research.uobkayhian.com/ 2022-10-20

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