• EBITDA stable y-y at S$1,265m despite lower revenue
• Underlying profits up 4% y-y at S$910m,  from higher associates' earnings and dividend income from joint venture
• Downgrade to "Neutral” with revised TP of S$3.53 under cautious outlook

SingTel  announced  its  3Q14  results  on  13  Feb  2014.  Underlying  net  profits increased  4%  y-y  despite  currency  headwinds.  This  was  due  to  strong  earnings contribution  from  Airtel,  owing  to  increased  data  adoption  and  usage  in  India. Lower  net  finance  expenses  also  contributed  to  the  increase  in  profits,  mainly from  S$27m  dividend  income  from  Southern  Cross.  Revenue  fell  7%  y-y  due  to lower  mobile  revenue  from  Optus  and  weakening  AUD  against  SGD.  The  lower mobile revenue was attributed to decreasing equipment sales and the mandated reduction  in  mobile  termination  rate  from  6.0c  to  4.8c  per  minute  since  1  Jan 2013.  Group  EBITDA  remains  stable  on  improved  cost  structure  driving  lower expenses  in  Optus.  This  lead  to  an  increase  in  EBITDA  margin  to  29.6%  for  the quarter (3Q13: 27.5%).

How do we view this

We  expect  lower  FY14F  EBITDA  y-y  due  to  significant  savings  from  operating expenses  recognised  in  4Q13.  This  is  inline  with  management's  guidance. Depreciation and amortisation would be higher from major expenditure on mobile network enhancements  in Singapore and Australia. S$2 billion would be invested in the digital business over the next 3 years. Despite growing revenue in the digital space,  its  Group  Digital  Life  continues  to  return  higher  negative  EBITDA  due  to start-up costs and higher investments. On a positive note, its Singapore business continues  to register healthy growth  in revenue from higher mobile,  fibre rollout and IPTV income.

Investment Action

We  revised  our  estimates  for  FY14F  earnings.  We  updated  our  SOTP  model  and arrived  with  a  new  TP  of  $3.53.  We  do  not  expect  a  quick  turnaround  in  Optus revenue,  on  views  of  declining  mobile  subscriber  base  and  further  reduction  in mobile  termination  rate  to  3.6c  in  2014.  We  see  limited  upside  based  on  our target price and we downgrade our rating to "Neutral".

Source: Phillip Securities Research - 14 Feb 2014