• SingTel's 2QFY19 core net profit fell 21.8% y-o-y. Results were below expectations.
• Post-revision, we forecast core EPS to fall 17.5% y-o-y in FY19F, then grow 2.5%/5.6% y-o-y in FY20F/21F. DPS stays at 17.5 Scts p.a. in FY19-21F.
• Maintain ADD with an 8% lower SOP-based target price of S$3.40.

2QFY19 Results Missed Expectations

• Singtel’s 2QFY19 core net profit missed expectations, with 1HFY19 forming 40%/43% of our/consensus’ FY19F forecasts.
• Core net profit fell 21.8% y-o-y (-2.5% q-o-q) due to lower associates (-22.7% y-o-y), Singapore (-17.4% y-o-y) and Optus (-15.4% y-o-y) profits.
• In constant currency terms, core net profit was down 18.1% y-o-y. A 1HFY19 DPS of 6.8 Scts (1HFY18: 6.8 Scts) was declared, which implies a 77% payout ratio.

Singapore: Consumer, Enterprise and DL Were All Weaker

• Singapore EBITDA fell 10.2% y-o-y (-8.5% q-o-q) while core net profit fell a steeper 17.0% y-o-y (-17.0% q-o-q) in 2QFY19.
• Consumer EBITDA fell 7.4% y-o-y on lower mobile service revenue and the absence of TV sublicense revenue.
• Enterprise EBITDA fell 3.3% y-o-y due to lower revenue.
• Digital Life’s (DL) LBITDA widened 149% y-o-y to S$34m due to one-off adjustment for accrual of stock option expenses and inclusion of Videology’s loss.

Optus: Impacted by More Competition

• Service revenue eased 4.2% y-o-y (-2.0% q-o-q) on consumer mobile service revenue (- 1.6% y-o-y) and lower NBN migration payments.
• Postpaid subscribers grew a healthy 93k q-o-q (+1.7%), while prepaid users fell 120k q-o-q (-3.2%).
• Blended ARPU declined 5.1% y-o-y (- 2.1% q-o-q) due to higher mix of SIM-only plans and data price competition. EBITDA fell 2.3% y-o-y (-3.8% q-o-q) [ex-NBN migration, +2.9% y-o-y].
• Core net profit was down a steeper 9.1% y-o-y (-9.4% q-o-q) on higher depreciation and interest cost.

Associate earnings dragged lower y-o-y by Airtel & Telkomsel

• Associate contributions in S$ terms fell 22.7% y-o-y mainly due to Airtel and Telkomsel.
• Despite a rebound at Telkomsel (+21.7% q-o-q), associate earnings eased 1.9% q-o-q as Bharti fell back into a small loss, while earnings from AIS, InTouch and Globe were lower.

FY19-21F Core EPS Cut by 10-15%

• Post-2QFY19 results, we cut FY19-21F Group EBITDA by 8-11% (core EPS: 10-15%). This factors in lower Optus contributions (more intense mobile competition) and lower Telkomsel and Bharti earnings.
• We also factored in weaker A$ and Rs. Post-revision, we forecast core EPS to fall 17.5% y-o-y in FY19F, then grow 2.5%/5.6% y-o-y in FY20F/21F.

Maintain ADD With 8% Lower SOP-based Target Price of S$3.40

• Singtel’s FY20F EV/OpFCF of 15.7x is at 10% premium over the ASEAN telco average, but backed by FY19-21F yields of 5.7% p.a.
• Potential rerating catalyst: earnings recovery in FY20F.
• Downside risk: keener competition.
• Our preferred Singapore telco pick.

Source: CGS-CIMB Research - 08 Nov 2018