• 1QFY20 under expectations
• Consumer business turning positive overseas
• Slightly higher FV of S$3.61

Under Expectations

Singtel’s 1QFY20 results were under our expectations. Operating revenue fell 0.5% YoY to S$4.1b (+2.3% YoY in constant currency terms), with higher equipment sales, NBN migration and digital services revenue though partially offset by lower carriage revenue. The group noted that this quarter has seen a mix of a cautious business environment, intense competition and erosion of voice revenue.

EBITDA dropped 1.9% YoY to S$1.2b, with EBITDA margin dropping 0.4ppt to 28.8%, on the back of an increased mix of lower-margin equipment and ICT sales. The group’s regional associates were largely affected by Airtel, excluding which, PBT would have increased 10% YoY to S$454m.

The group’s underlying net profit came in at S$575.1m, or 19.3% of our full-year forecast. We note that Singtel has booked its share of Airtel’s net exceptional loss arising mainly from incremental provision for derivative liabilities relating to the Airtel Africa IPO. There is little clarity at this point as to whether these will continue to feature moving forward.

No Effective Change to Full-year Guidance

Management highlighted that its revised guidance has been updated to include the effects of SFRS (I) 16. This would see EBITDA growing by high single digit (previously stable), and FCF, excluding spectrum payments and dividends from associates, to be ~S$2.4b (previously ~S$2.1b).

Some Light at the End of the Tunnel

While Singapore’s consumer market remains challenging (post-paid ARPU declined 13% YoY), we are encouraged by developments in some of Singtel’s major markets. In Australia, we understand that Telstra has raised prices, which Optus has followed in Apr’19, and just last week Optus has also adjusted its SIM BYO plans upwards. These should have a positive effect on ARPU and mobile service revenue moving forward.

In India, we understand that Vodafone Idea has started to follow Airtel in removing its low-valued post-paid plans. On the group’s enterprise business, we note some near-term speed bumps in the form of a cautious economic outlook, causing regional MNCs and local SMEs to become more cautious in their spend, while Australia sees a bit of softness in the local banking sector; Singtel remains hopeful for more government contracts post-elections.

Following our model updates (latest share prices of key associates and reduced stake in Airtel), our FV rises slightly from S$3.59 to S$3.61.

Source: OCBC Research - 13 Aug 2019