• 2QFY19 beneath expectations
• ICT to see a better 2H
• Lower FV of S$3.95

Below Expectations

Singtel’s 2QFY19 results were broadly under our expectations. Revenue came in flat YoY at S$4.3b (+3.9% in constant currency terms); mobile revenue grew 5.6% YoY on the back of higher equipment sales, but this was partially offset by lower voice usage, as well as a higher mix of SIM-only plans and price competition.

Operating expenses grew 4.1% YoY (+8.0% in constant currency terms), mainly from higher equipment sales and digital services, as well as higher content costs partially offset by lower ICT sales. Taken together, EBITDA fell 9.6% YoY ( -5.8% in constant currency terms) to S$1.1b, comprising 22.3% of our full-year forecast.

In constant currency terms, the associates’ post-tax underlying contribution would have dropped 17.9% YoY mainly from Airtel and Telkomsel. The group’s underlying NPAT fell 21.8% YoY to S$715.2m, comprising 19.9% of our full-year forecast.

Some Slight Positives From Associates

In India, while management noted that the market remains challenging and in a state where it is too early to conclude on how it will evolve, green shoots are slowly emerging. While Airtel saw ARPU drop on a QoQ basis, management noted that this was at a slower rate (106 to 101 Rs), reflective of Airtel’s strategy of chasing high value/quality market segments. Developments in Indonesia appear to be encouraging, with Telkomsel posting 22% QoQ earnings growth, following price recovery in the market since July 2018 after Lebaran.

Guarded Optimism on 2HFY19

Management has broadly reaffirmed its previous outlook, though making downward adjustments for revenue from Cyber Security and Amobee. Given some YoY weakness in 1HFY19, we are expecting a better YoY EBITDA performance in 2HFY19, bolstered by YoY growth in Australia Mobile Service revenue as well as in the group’s ICT segment.

For the latter, 1HFY19 revenue is down 4.9% YoY, but management has highlighted that the order book remains strong, and we note the potential tailwinds as the Singapore government’s lifts the pause on new ICT systems following the review of its cybersecurity policies.

Unlike its peers, we believe that Singtel’s diversified regional footprint would allow it to better weather the entry of TPG Telecom, with minimal risk to DPS for FY19 and FY20. Following cuts to our FY19F/20F earnings estimates, we reduce our FV from S$4.08 to S$3.95.

Source: OCBC Research - 9 Nov 2018