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Simons Trading Research

Author: simonsg   |   Latest post: Fri, 19 Jul 2019, 9:08 AM

 

SingTel - Focus on Defending Core Business & Staying Lean

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  • SingTel (SGX:Z74) aims to defend its market leadership position in consumer telco services, growth in digital businesses and keep a lid on cost. FY20 guidance includes mid single-digit revenue growth and EBITDA stable at S$4.5b.
  • Competition overhang from TPG appears muted but sliding voice usage and data competition remain as key challenges in both Singapore and Australia.
  • Maintain BUY on share price weakness with a target price of S$3.58.
  • Valuations have reverted to the mean for the stock, dividend yield is 5%.

What’s New

FY20 outlook: Cautiously optimistic.

  • In a recent SingTel Investor Day, management re-iterated its commitment to:
    1. defend its market leadership position in consumer telco services in both Australia and Singapore,
    2. drive digital businesses, and
    3. keep a tight lid on cost structure - digitisation of traditional operating model to be able to pass on the cost savings to consumers.
  • All in all, SingTel guides for mid single-digit revenue growth in FY20 and EBITDA of ~S$4.5b.

Group consumer: Focus on customer experience.

  • Amid lower voice usage and data competition in Singapore, SingTel aims to focus on good customer experience and superior content offerings. A lean cost structure via continuous digitisation (transforming with new operating model) effort is expected to yield stable EBITDA margin for the traditional telco businesses.
  • Management believes the launch of GOMO – an all-digital, no-contract SIM-only product, will allow SingTel to capture the millenial segment and anecdotal evidence suggests that cannibalisation on existing subscriber base is minimal. Threat of TPG appears muted at this stage.

Customer first in Australia.

  • We expect Optus to ride on its encouraging postpaid trend (+454,000 net adds) and record EBITDA ($2.5b) in FY19. For FY20, Optus will focus on:
    1. driving brand recognition, and
    2. differentiate with exclusive content like National Geographic and Optus Sports application.
  • 5G fixed wireless access provides long-term opportunity as Optus plans to roll out 1,200 sites by Mar 20.

Group enterprise: Re-pricing of government contracts up to 3QFY20.

  • In managed services (which accounts for 37% of group enterprise S$3b revenue), management expects revenue compression due to re-pricing of large government contracts progressively from FY19-20. Managed service revenue is expcted to stablise by 3QFY20.
  • Guidance for group enterprise business: ICT to grow low single digit with cyber security growing at low teens. Business environment remains cautious amid trade tensions between China and the US.

Group digital life: The growth engine.

  • 25% of revenue comes from new businesses (including cyber security) for SingTel, and participating in the digital economy is a non-negotiable strategy. Amobee and DataSpark are EBITDA positive but HOOQ will continue to drag earnings in FY20.
  • Management aims to grow Amobee by high single digit in terms of revenue and EBITDA by a substantial amount. In addition, there are plans to monetise Amobee in the next three years via an IPO or private investors.

Implications of a Huawei ban.

  • Most of SingTel’s operating companies (opcos) appear ready to switch to out of Huawei in the event the trade war escalates further between China and the US. Most SingTel opcos already have in place multi-vendor stategy and should be able to renegotiate for better cost strcuture in the event of an outright Huawei ban.
  • Huawei is commonlly acknowledged to provide better quality, higher specficiation and importantly, is at least 6 months ahead of its peers in terms of technological offerings.

Stock Impact

Maintain cash flow at 17.5 S cents for FY20.

  • Barring unforeseen circumstances, management intends to maintain ordinary dividends at 17.5 S cents for FY20, and thereafter revert back to paying 60-75% of underlying net profit. This translates to a net dividend yield of 5.3% for FY20.

EARNINGS REVISION/RISK

  • No change to earnings estimates.

Valuation / Recommendation

  • BUY on share price weakness with a target price of S$3.58, based on DCF (required rate of return: 6.25%, growth: 1%).

Source: UOB Kay Hian Research - 14 Jun 2019

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