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Simons Trading Research

Author: simonsg   |   Latest post: Fri, 13 Dec 2019, 4:31 PM

 

SingTel - a Sequentially Stronger 2QFY20, Headwinds From Airtel Have Not Abated

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  • We expect a sequentially stronger 2QFY20 driven by higher handset sales and cyber security revenue, as well as cost discipline. Regional associates, namely Telkomsel and Airtel Africa, have posted stellar performance.
  • Key risk includes a potential write-off as Airtel India has been slapped with a US$3b fine on tax payable to the Indian government.
  • Downside will be supported by dividend yield of 5.2% for FY20. See SingTel Dividend History.
  • Maintain HOLD and S$3.32 target price. Entry price: S$3.00.

What’s New

2QFY20 results preview.

  • We expect SINGTEL (SGX:Z74) to book a sequentially stronger 2QFY20 core net profit of S$650m (+13% q-o-q; -9% y-o-y). The quarter will remain characterised by heightened mobile competition in Singapore (shift towards SIM-only plans) and soft enterprise business margins given price pressure from lumpy public sector contract renewal.
  • Positively, regional associates, namely Telkomsel and Airtel Africa, have posted stellar profit performance in the quarter (listing on 3 July effectively reduced interest cost).
  • Key risk to 2QFY20 includes a potential impairment/write-off as Airtel India has been slapped with a US$3b fine on tax for adjusted gross revenue (AGR) payable to the Indian government.
  • SingTel's Results will be announced on 14 November. See SingTel Announcements.
  • (See Earnings Schedule for STI Constituents (September 2019 Quarter))

Group consumer: Competition remains intense.

  • In Singapore, we expect mobile revenue to decline 2-3% for 2019 as a result of declining voice and price competition from MVNOs’ SIM-only plans. This is expected to be partly offset by higher equipment sales in the quarter. We have factored in a 13% y-o-y decline in ARPUs to S$38/month for 2QFY20 (1QFY20: - 27% y-o-y).
  • In addition, Optus’ earnings will be partly affected by a 6% q-o-q depreciation of the Australian dollar.

Group Enterprise: Weak business sentiments.

  • We expect enterprise business to remain weak given on-going renegotiation of ICT contracts in Singapore and short-term weakness in Australia. In essence, Australian banks are pouring resources to beef up compliance, which have resulted in a short-term decline in Optus’ enterprise business.

Regionally, Bharti’s mobile services revenue rose 7% y-o-y

  • Regionally, Bharti’s mobile services revenue rose 7% y-o-y and 1% q-o-q for 2QFY20, thanks to 2.6m mobile net adds (after four consecutive quarters of losing users). In addition, Airtel Africa also reported a strong 2QFY20, with net profit up 60% y-o-y to $90m given:
    • higher revenue (+10% y-o-y),
    • lower finance cost (-23% y-o-y) as proceeds raised from IPO helped reduce debt, and
    • improved operational efficiency.
  • However, the overhang for Bharti remains as the potential ~US$3b fine on tax for adjusted gross revenue payable to the government.

Telkomsel also reported a stronger sequential performance for the quarter ending 30 Sep 19

  • Telkomsel also reported a stronger sequential performance for the quarter ending 30 Sep 19 for the quarter ending 30 Sep 19 with a 5% q-o-q (flat y-o-y) growth in underlying net profit. This was supported by:
    • robust data traffic growth,
    • lower subscriber churn given ongoing customer retention initiatives, and
    • prepaid SIM registration policy that brought better-quality subscriber base.

Stock Impact

Healthy dividend yield of 5.2% for FY20.

  • Barring unforeseen circumstances, we believe SingTel is able to deliver an interim dividend of 8.5 S cents for 2QFY20 as management intends to maintain ordinary dividends at 17.5 S cents for FY20. This translates to a net dividend yield of 5.2% for FY20. See SingTel Dividend History

5G spectrum allocation by end-19…

  • The Infocomm Media Development Authority (IMDA) has decided on a 2-player nationwide network and an additional 2-player localised network framework. The two-network 5G framework will likely hold the 3.5 GHz spectrum for national coverage. We expect IMDA to allocate 5G spectrum by 30 Jun 20.

…with Singtel a potential beneficiary…

  • We believe the two-player nationwide network will include:
    • SingTel, and
    • a consortium of multiple mobile network operators (MNOs) such as StarHub (SGX:CC3)/M1/TPG and fibre network provider ie NetLink Trust (SGX:CJLU).
  • Potential capex may be in the region of S$1-2b as IMDA aims for 50% coverage within 24 months from the commencement of the 3.5 GHz spectrum right. Assuming a capex budget of S$1b-2b per 5G network operator, SingTel may have to raise capital as its current net debt-to-EBITDA and share of associate net profit is just slightly under 2x (1.92x as at 30 Jun 19).

…in the longer run with 5G.

  • We believe the initial use case will be limited to smart cities, smart yard-confined and autonomous vehicle applications. This implies that meaningful earnings growth from 5G application and ecosystem will only materialise from 2022 onwards. As such, in the near term, SingTel's share price performance will be capped by higher capex intensity as telcos shift into the next 5G investment cycle.

Earnings Revision / Risk

  • No change to our earnings forecast.
  • We project a modest three-year net profit CAGR of 6.5% in FY19-22, underpinned by recovery in Airtel in the next three years.

Valuation / Recommendation

  • Maintain HOLD and DCF-based target price of S$3.32 (COE: 5.9%; terminal growth: 1%), or 14.1x EV/EBITDA. See SingTel Share Price; SingTel Target Price.
  • At our target price, SingTel will trade above its 5-year EV/EBITDA mean of 13.6x. This reflects heightened mobile competition and higher 5G capex intensity. Having said that, we expect cost efficiency and potential 5G leap will set the group on a stronger footing to capture revenue growth in the medium term (beyond 2021).
  • Entry price is S$3.00.

Source: UOB Kay Hian Research - 11 Nov 2019

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