• SingTel's core EPS drop of 15.1% y-o-y in 4QFY3/19 largely in line with our forecast.
• We forecast FY20F core EPS to be flat before growing 10% y-o-y in FY21/22F.
• Maintain ADD with a 3% higher SOP-based target price of S$3.40.

SingTel's 4QFY19 Results Slightly Missed Consensus Expectations

• SINGTEL (SGX:Z74)’s 4QFY19 core net profit was largely in line with our but slightly missed consensus estimate, with FY19 coming in 4%/6% below our/consensus forecasts.
• Core EPS fell 15.1% y-o-y (+2.7% q-o-q) due to lower associate (-17.4% y-o-y) and Singapore (- 33.3% y-o-y) profits, partly buffered by higher Optus (+2.7% y-o-y) earnings. In constant currency terms, core net profit was down 14% y-o-y.
• As expected, final DPS was at 10.7 Scts, which kept the annual DPS at 17.5 Scts (payout ratio: 101%) for FY19.
• SingTel guided for stable FY20 EBITDA (FY19: -17.1%) and DPS at 17.5 Scts.

Singapore: Enterprise Under Pressure

• Singapore EBITDA/core net profit fell 10.9%/33.3% y-o-y (-16.9%/32.2% q-o-q) in 4QFY19.
  • Consumer EBITDA rose 5.2% y-o-y (-13.2% q-o-q) mainly on cost saving initiatives.
  • Enterprise EBITDA fell 12.6% y-o-y (-13.4% q-o-q) due to price erosion on ICT contract renewals (public sector competition), lower fixed voice/mobile roaming and investments in digitalisation programmes.
  • Digital Life’s (DL) LBITDA was at S$18m vs. 4QFY18’s breakeven (one-off content cost credits/government grant) and wider by 12.5% q-o-q.

Optus: Up Due to Resumption in NBN Migration Payments

• Service revenue rose 1.6% y-o-y (+2.5% q-o-q) on higher NBN migration payments (+446% y-o-y) after a temporary suspension was lifted, while mobile service revenue was steady.
• Postpaid subs grew a healthy 126k q-o-q (+2.3%), while prepaid users fell 109k q-o-q (- 3.1%) due to deactivation by a major wholesale customer (-125k). Blended ARPU eased 2.7% y-o-y (+0.8% q-o-q) on more competition and higher mix of SIM-only plans.
• EBITDA/ core net profit rose 6.1%/10.3% y-o-y (+12.7%/+32.5% q-o-q).

Associate Earnings Down Y-o-y Due to Bharti; Rebounded Q-o-q

• Associate contributions in S$ terms fell 17.4% y-o-y due to wider share of Airtel losses at S$98m (4QFY18: -S$7m), partly buffered by higher earnings at Globe (+52.6% y-o-y). q-o-q, associate earnings rebounded 13.7% q-o-q due to higher share of earnings from Globe (+94.3%), AIS (+13.3%), Intouch (+19.2%) and other associates (+16.9%).

• We maintain our core EPS for FY20F but raise it by 5.4% for FY21F, mainly to factor in higher Optus earnings (NBN migration payments). Our SOP-based Target Price is raised by 3% after we cut our risk-free rate (-0.8% pt to 2.0%) to reflect the current 10-year government bond yields.
• SingTel’s FY20F EV/OpFCF of 15.6x is roughly in line with the ASEAN telco average, backed by FY20-22F yields of 5.6% p.a.
• Potential re-rating catalyst: earnings recovery from 2HFY20F.
• Downside risk: keener competition.

Source: CGS-CIMB Research - 15 May 2019