• Underlying earnings of S$715m (-2% q-o-q,-22% y-o-y) was 12% below our estimate of S$811m mainly due to weak Singapore contribution; FY19F/20F EPS cut by 3%.
• Singtel affirming its FY19F guidance implies pick up in 2H19F EBITDA from – ICT revenue and cost savings.
• BUY with lower Target Price of S$3.59 for assured 17.5Scts DPS (5.6% yield) and FY19F-21F EPS CAGR of 7%; Attractive valuation of 16x FY20F PE, representing -1 SD of historical average at 17x.

What’s New

Underlying earnings below expectations; surprise largely stemmed from a weak Singapore.

• Singtel’s underlying profit of S$715m (-2% q-o-q, -22% y-o-y) was ~12% below our expectation of ~S$811m.
• Almost 60% of the miss came from Singapore with underlying profit dropping to S$225m (-17% q-o-q, -18% y-o-y) versus our expectation of stable profit.
• The balance of the miss (30%) came from associates with underlying profit of S$377m (-2% q-o-q, -23% y-o-y) versus S$404m estimate as higher depreciation and amortisation charges weighed on contributions from AIS, and Globe recorded a sequentially weak quarter. Telkomsel recovered strongly to more than offset the weakness of Bharti, largely expected.
• Higher withholding taxes of S$36m vs. our expectations of S$16m further pulled underlying net profit lower.

Guidance for stable FY19F EBITDA from core business despite 1% y-o-y drop in 1H19, implies pick up in 2H19F.

• The guidance assumes AUD/SGD of S$1.05 versus S$1.00 now and excludes National Broadband Network (NBN) migration fee in Australia. 
• Two key drivers in 2H19F would be
  1. rebound in Infocomm Technology (ICT) revenue with ~S$300m of additional ICT revenue versus 1H19 from Smart Nation contracts;
  2. S$300m of cost savings in 2H19F versus S$193m cost savings in 1H19.
• However, we have trimmed FY19F/20F EBITDA from the core markets by 2% each to factor weaker Singapore contribution, leading to 3% cut in FY19F/20F EPS.

Singapore disappointed due to three key reasons.

1. S$13m sequential drop in Singapore consumer EBITDA due to drop in mobile service revenue
2. Amobee recording negative EBITDA of S$10m (vs. breakeven in 1Q19) with the consolidation of losses of the Videology
3. ~S$5m sequential drop in Singapore enteprise EBITDA due to weak ICT revenue and rise in costs.

BUY with revised Target Price of S$3.59.

• We lowered our sum-of-the-parts (SOTP) valuation to S$3.59 as we cut FY19F/20F EBITDA in Singapore by 4% each. See the breakdown on SOTP in the PDF report attached. 
• Reiterate our BUY call on the back of a rebound in associate contributions in FY20F led by Telkomsel, AIS and Globe. attractive valuations, and ~5.6% dividend yield.

Source: DBS Research - 08 Nov 2018