• 2Q underlying profit up 3.1% YoY
• Developments in Australia leading to guidance revision
• Reduced FV of S$3.53

Adverse Ruling Impacted P&L

Singtel’s 2QFY20 operating revenue fell 2.8% YoY to S$4.2b, or +0.1% YoY in constant currency terms. Notably, Group enterprise revenue fell 5% YoY, largely due to the cautious business environment and weaker demand from key finance sectors in Australia and decline in carriage services. Ex-Airtel, Singtel’s regional associates delivered a healthy 10% growth in PBT (or 5% in constant currency terms).

In the quarter, Singtel booked a S$1.4b provision for Airtel, on the back of an adverse court ruling in India against the industry on the definition of “adjusted gross revenue”.

The group clocked an underlying profit of S$737.0m, up 3.1% YoY or 1.2% in constant currency terms. This formed 24.7% of our full-year forecast, which we deem to be broadly within expectations. Singtel has declared an interim dividend of 6.8 S-cents/share.

5G Capex Rollout Similar to Previous Cycles

Management noted that capex as % of revenue in the investment years of a technology refresh is typically in the low to mid-teens range, and should taper to a single digit in a steady state – the upcoming 5G cycle in Singapore should be no different. Also, management noted that they see some stabilisation in the Singapore market amongst the 3 major MNOs, even as more MVNOs will be coming into the market next year.

Separately, we are encouraged by the group’s S$3.3b NCS order book (~+14% QoQ, as of 30 Sep), with key wins from various government agencies.

Revised Guidance Due to Australia

In Australia, we note that NBN revenue recorded a notable surge from A$23m in 2QFY19 to A$187m in 2QFY20. However, this is expected to be lumpy going forward as it hinges on NBN’s speed and rollout prioritisation; another 12-18 months might be needed for the migrations to be completed. We also note signs of ARPU stabilisation, with mobile ARPU flat on a QoQ basis, as telcos look to rationalize subsidies.

Singtel has updated its guidance with group revenue and EBITDA to be stable (previously mid and high single digit, respectively). This is in light of (a) lower mobile net adds in the Australian consumer business on the back of transitory effects as customers adjust to lower subsidies, and (b) to account for the weaker Australian enterprise sector. As for capex guidance, this has been reduced to S$2.1b (previously S$2.2b).

Looking for Respite in the Indian Market

We understand that Airtel, together with the other Indian telcos, are making representations to the government for relief. Still, management remains confident on Airtel’s financial position and funding options, which would reduce the risk of a cash infusion from Singtel.

Also, from another angle, should a deal with the authorities fail to materialize, we believe this could benefit Airtel should Vodafone-Idea’s competitive position become compromised. We trim our FY20/21 estimates by 5.7%/2.8%, respectively, and lower our FV from S$3.61 to S$3.53.

Source: OCBC Research - 18 Nov 2019