• Expects intense competition in Australia
• Dividend unlikely affected by 4th Telco
• Upgrade to BUY with new S$4.40 FV

Core NPAT met 49% of street’s estimates

Singtel’s 1HFY17 revenue fell 4.8% YoY to S$7994.2m, impacted by the decline in mobile termination rates in Australia, higher mobile service credits from device repayment plans, and lower equipment sales. However, with an increase in associates post-tax underlying profit contributions of 15%, mainly from Telkomsel, core NPAT rose 3.4% YoY to S$1933m and met 48.8% of the street’s estimates. Going forward, Singtel expects FY17 consolidated revenue to decline by low single digit on expectations of heightened competition in Australia, especially in the lower-end prepaid market pressured by mobile virtual network operators (MVNOs). FY17 EBITDA is expected to remain stable.

Least impacted by 4th Telco entry in Singapore

Following the submission of Expression of Interest (EOI) documents by three applicants (on 1 Sep) for the New Entrant Spectrum Auction (NESA) to Infocomm Media Development Authority of Singapore (IMDA), we are of the view that a 4th Telco entry is a highly probable scenario. Hence, we incorporate assumptions to reflect a 4th Telco entry. That said, we do not think the impact of a 4th Telco entry in Singapore will be material on Singtel’s earnings as a group. Based on 1HFY17 results, only ~26% of its EBITDA was derived from Singapore, and out of this 26%, only ~32% of it was derived from the consumer segment in Singapore, which includes its pay TV and broadband businesses. Hence, we do not think losing 2-3% revenue share over the next five years will materially affect its dividend payout.

Supported by 4.6% forward dividend yield

With a change in analyst coverage, we factor in new assumptions for 4th Telco entry in Singapore from FY18 onwards and Singtel’s latest guidance for FY17, as well as update our DCF assumptions and share prices of Singtel’s listed associates. Consequently, our SOTP-based fair value increases from S$4.26 to S$4.40. With the recent share price weakness, we upgrade Singtel from HOLD to BUY rating, as we continue to like its diversified portfolio and long-term prospects through its exposure in developing economies and strong presence in enterprise segment.

Source: OCBC Research - 11 Nov 2016