Still on Competition-cautious Mode. HOLD

• We attended the SINGTEL (SGX:Z74) Investor Day and came away with a general sense that competition in most of its markets is in a period of calm but the road to repair is unclear.
• With this note, we adopt our latest Bharti forecasts. This raises our FY20/21E core profit forecasts by 1% and our SOTP Target Price by 3% to SGD3.48 (see Fig1 in attached PDF report for breakdown of SOTP).
• Maintain HOLD where competitive intensity is the key downside and upside risk to our outlook.

Grey Area

• Most of SingTel’s major markets of exposure have either gone through a period of intense competition or faced the threat of new competition over the past 18-24 months. The impact on industry revenue and share prices has led to a relative lull in India, Thailand, Philippines and Indonesia.
• Whether the peace holds or, even better, market pricing repair takes place is not yet a certainty in our view.

Much of the Wireless Competition Risk Is Priced in

• We believe the wireless sector revenue and earnings pressure is largely priced in across SingTel’s regional holdings. Hence, for a number of the listed parts of SingTel under MKE coverage (i.e. Singapore, Philippines and India) our ratings have been raised from SELLs to HOLDs over the past 6-12 months.

What’s Not in the Price

• The market and MKE generally have not separately valued the Digital Life and Trustwave segments of SingTel. This segment’s peers, typically valued based on trading valuations rather than DCF could crystallize in the long-term through an IPO.
• Meanwhile, on the risk side whether the en-masse moves of competitors to tap into more enterprise contracts leads to compression in that segment is worth watching.
• Also, the 5G capex cycle and monetization model is also not likely factored in, whether as upside (e.g. opportunity for price recovery) or downside risk (i.e. initial FCF burden).

Investor Day Highlights

Singapore Consumer, Enterprise and Group

• The pricing and product niche of SIM-only plans is now adequately covered by incumbents and MVNOs, leaving little room for TPG’s commercial launch.
• The launch of wireless digital brand and platform (“GOMO”) is to target the millennial segment that SingTel was previously not tapping into. Thus far, the brand has not cannibalized SingTel’s main brand offerings.
• The 5G business case for Singapore is largely for enterprise rather than consumer/retail based on current capabilities and device ecosystem. As such, significant capex is not expected for the medium term. More will be known after the 5G consultation by regulator IMDA is completed this month.
• The trade war risks have resulted in a slowing down of the overall enterprise environment.
• Managed services and cyber security payment compliance enterprise business segments have been compressing. The former, however, is at least on the back of renewing multi-year government contracts and maintaining its public sector market share leadership. Management is targeting to increase share in the faster growing segments of cloud services and digital services and IOT. Likewise, the goal is to increase commercial sector market share.
• The e-payment initiative across the group is being undertaken through a common and seamless alliance and platform (“VIA”). The monetization of the initiatives will partly derive from forex conversion margins but longer term from data-mining users’ preferences and potential credit ratings.
• Enterprise digitalization remains an opportunity within the group (cost, efficiency and customer engagement benefits) and as a revenue generator from external client contracts.

Digital Life

• Investments in videology technology along with pressure on traditional revenue sources such as media suppressed FY19 EBITDA. The three-year plan is to focus its digital marketing initiatives on Amobee (Not Listed) to higher growth segments such as programmatic ads, digital and TV convergence, and the anonymized customer data monetization.
• The future aim is to realize value in Amobee as its listed peers trade at 5x to 21x revenue multiples, with the programmatic peer being at the upper end of this range.
• Video streaming subsidiary Hooq (Not Listed) is one of three remaining independent platforms left in ASEAN. It will take 1-2 years more of investments to build scale.

Optus

• New base station permits typically go through a 1.5 year approval process.
• The bulk of base station equipment that was sourced from Huawei (Not Listed) is not under threat from the equipment ban. None of the core network equipment is sourced from Huawei.

AIS

• Wireless revenue growth on a stand alone basis remains challenging so growth will be achieved through fixed fibre broadband on both standalone and as a bundled package with wireless.

Bharti

• The enterprise business segment remains under-penetrated and will be targeted. Data centre initiatives have also been underway and will be monetized in the future to help reduce leverage.

Globe

• SIM-only, no-contract plans are gaining traction in the market with 25-30% of new acquisitions coming from this segment. Although MNP is on the horizon, management expects little impact.

Telkomsel

• There are now effectively five wireless operators as Smartfren (FREN IJ, Not Rated) and Hutch 3 (Not Listed) have gained enough traction such that their pricing action impacts XL Axiata (EXCL IJ, Not Rated) and Indosat (ISAT IJ, Not Rated). This in turn can lead to Telkomsel needing to also react.

Source: Maybank Kim Eng Research - 12 Jun 2019