• Maintain NEUTRAL with SOP-based Target Price adjusted to SGD3.35 from SGD3.09, 6% upside, after rolling forward our base year.
• SingTel (SGX:Z74)'s FY19 results missed consensus numbers on weaker-than-expected enterprise margin. Our FY20F/21F core earnings are adjusted by -2.5%/+1.2% post the results call. FY22 estimates have also been introduced.
• FY20F EV/EBITDA of 11.7x is fair, at 15% below the average historical EV/EBITDA of 13.5x, considering continued margin and associate headwinds.
• Key risks are competition and weaker-than-expected margin.

Falling Short of Consensus

• SingTel's FY19 core earnings (-21.4% y-o-y/+2.5% q-o-q) of SGD2.8bn broadly met our forecast (95%) but trailed consensus (94%). Notable drags were weaker EBITDA (-7.1% y-o-y) and associate contributions (-37.6% y-o-y), compounded by the weaker AUD, which slipped 6% y-o-y against the SGD.
• The EBITDA slippage was ahead of our forecast of -2%. Group revenue was stable (+0.6% y-o-y) as weaker enterprise revenue was more than offset by higher digital life contributions (+13.3% y-o-y).
• An expected final DPS puts FY19 DPS at SGD0.175, reflecting a payout of 101%.

Singapore EBITDA Margin Hit New Low

• Group FY19 EBITDA margin narrowed 2ppts y-o-y to 27% with Singapore EBITDA margin at a new quarterly low of 21%, on persistent erosion in domestic enterprise margin from falling legacy revenues. EBITDA margin ticked up on a q-o-q basis from seasonality, with the resumption of NBN migration revenue and cost efficiencies at Optus.

Overall Mobile Service Revenue (MSR) Impacted by Higher Take-up of SIM-only Plans

• Singapore MSR fell 4.9% q-o-q in 4QFY19 (-4.6% y-o-y) despite the addition of 32,000 postpaid subs – this is as postpaid ARPU fell 5% q-o-q to SGD41, driven mainly by higher take-up of SIM-only plans, handset amortisation, and seasonally lower roaming revenue. Prepaid ARPU fell 6% q-o-q to SGD17, after holding steady for 10 quarters due to postpaid conversion.
• Optus MSR was down a marginal 0.3% y-o-y in 4QFY19 (FY19: -0.8% y-o-y) due to dilution from SIM-only plans, partially offset by stronger postpaid growth.

Enterprise Still Seeing Significant Headwinds

• The decline in enterprise EBITDA accelerated to 15.6% y-o-y from -9.1% y-o-y in 3QFY19 from continued erosion in legacy usage revenues and shift in revenue mix.
• Enterprise EBITDA remains under pressure with price competition on public sector jobs and the change in revenue mix (ICT revenue now makes up 51% of enterprise revenue from 48% a year ago), which crimped margin to a low of 23.2% in 4QFY19.

Associate Contributions Down 37% YTD

• Associate contributions improved 13.6% q-o-q as stronger contributions from Globe (GLO PM) and AIS (ADVANC TB) more than offset losses at Airtel. Telkomsel’s revenue and EBITDA fell 6% and 5% q-o-q respectively on seasonality, while AIS’ EBITDA rose 5% q-o-q on lower sales and administration charges.

Digital Revenue Contribution Now Makes Up 7 % of Revenue

• Incorporating newly-acquired Videology (from 2HFY19) and the more than doubling of HOOQ revenue on greater scale, digital revenue was up 13.3% YTD. That said, it remains EBITDA dilutive with an EBITDA loss of SGD18m in 4QFY19 and SGD92m for FY19.

Results Call Highlights

• Optus is expected to continue to focus on profitable market share gains as network parity was achieved with Telstra (TELS AU). Management noted some green shoots in India with Airtel posting the first q-o-q growth in revenue – the first in 10 quarters.
• On 5G, Singtel believes it is still early days given the lack of mobile/consumer use cases.
• See attached PDF report for SingTel's result summary table and sum-of-parts valuation details.

Source: RHB Invest Research - 15 May 2019