• Downgrade to NEUTRAL from BUY with revised SOP Target Price of SGD3.22 from SGD3.70, 4% upside.
• SIngTel's 1HFY19 (Mar) results underwhelmed with core earnings down 21% y-o-y on continuing weak associate contributions and margin pressure. We continue to see earnings headwinds and competitive risks across most of its mobile footprint. Growth drivers are the recovery in enterprise/ICT revenue via the resumption of smart nation projects, and additional opex savings.
• We lower our FY19F-21F core earnings by 11-12% post the results call.
• Key risks are stronger-than-expected competition at its core mobile business, and larger-than-expected gestation losses at its digital arm.
• Singtel remains our preferred domestic sector play.

FX and Regional Pressure

• SingTel's 2QFY19 core earnings of SGD715m fell 22% y-o-y (-2.5% q-o-q) on weaker EBITDA (-9.6% y-o-y, -6.5% q-o-q) and the protracted regional weakness, which saw contributions slip 50% y-o-y (-21% q-o-q). 1HFY19 core earnings of SGD1.45bn (+21%) formed 43% and 44% of RHB and consensus estimates, missing expectations.
• Broadly, the results were impacted by negative FX movements, specifically the AUD, INR and IDR which fell 5-8% y-o-y (down 1-2% q-o-q) against the SGD, lumpy enterprise revenue, and the shift in revenue mix (less carriage).
• An expected SGD0.068 DPS was declared, reflecting a payout of 77%.

Core Mobile Business Still Lethargic With Dilution From SIM-only Plans

• Singapore postpaid subcribers growth was strong (+2% q-o-q) but likely shored up by its mobile virtual network operator (MVNO) brands, and aggressive re-contracting on new handsets.
• Singapore mobile service revenue (MSR) fell 2.3% q-o-q (1HFY19: -4.5%) with higher mobile data revenue offset by roaming weakness, a higher mix of SIM-only plans, and data add-on packages. The impact was magnified by higher subsidies on premium handsets, which were netted off from service revenue (under the new SFRS 15 classification).
• Singapore consumer EBITDA fell 6.5% q-o-q from higher content cost (World Cup 2018 broadcast) and cessation of pay-TV sub-license revenue of SGD8m for the English Premier League (EPL).
• Australian (Optus) MSR eased 2.1% q-o-q (-2% y-o-y) in AUD terms, while consumer EBITDA fell 4% q-o-q, mainly from higher opex.

Enterprise Remains Patchy

• Group enterprise revenue and EBITDA fell 4% and 6% YTD from weaker ICT revenue (-4.4%) due to a higher base for project completions in 1HFY18. It was up 4% q-o-q on seasonality.
• Cyber security revenue (Trustwave) remained under pressure, down 2% y-o-y from the commoditisation of the payment card industry (PCI) data security business in the US.

Telkomsel Bucked the Otherwise Poor Regional Showing

• Bharti remained the key drag on sustained price competition in India. While management observed some ‘green shoots’, the overall environment remains difficult.
• The bright spot, Telkomsel, witnessed a strong 23% q-o-q rebound in share of contributions – the first in four quarters – from the recovery in data yields.

Outlook

• We continue to see earnings and competitive headwinds across most markets. Singtel has reaffirmed its headline guidance of single-digit revenue growth and stable EBITDA, implying a stronger 2HFY19.
• Key growth drivers would be the recovery in enterprise/ICT revenue (1HFY19: -4% y-o-y) via the resumption of smart nation projects following the Government’s review of cyber security risks/measures, and additional opex savings.
• YTD cost savings of SGD193m is tracking in line with the SGD500m guidance for FY19.
• Optus believes competition will be confined to the price-sensitive segment (the domain of MVNOs) with little change in market dynamics even with the merger between TPG and Vodafone Hutchison (VHA).
• Key risks are stronger-than-expected competition at its core mobile business, and higher gestation losses for its digital arm.

Downgrade to NEUTRAL, SOP Target Price Lowered to SGD3.22

• We continue to see earnings headwinds across key markets. Post the results call, we lower our FY19F-21F core earnings by 11-12%. The adjustments reflect:
  1. Weaker contributions for Bharti;
  2. Downward revision to our margin assumptions for the enterprise business;
  3. Lower longer-term MSR growth assumptions for the Singapore business.
• We see SingTel’s share price outperformance (relative to FSSTI) as a reflection of the group’s diversified earnings base and sizeable market capitalisation, although these are likely priced-in.

Source: RHB Invest Research - 09 Nov 2018