• SINGTEL (SGX:Z74)'s 1QFY20 core net profit fell 22% y-o-y to S$575m on heightened mobile competition in Singapore and Australia, lower enterprise profitability given the shift in revenue mix and widened Airtel losses.
• Results are below expectations and we cut FY20-21 net profit forecasts by 13% and 7% respectively.
• In tandem with the earnings downgrade, our DCF-based target price is lowered to S$3.32. Downgrade to HOLD as SingTel's share price has rebounded 13% ytd.
• We are cautiously optimistic and prefer a S$3.00 entry price level.

1qfy20 Results

1QFY20 results below expectations.

• SINGTEL (SGX:Z74) reported a 1QFY20 core net profit of S$575m (-22% y-o-y; -18% q-o-q). Results were adversely affected by:
  1. heightened mobile competition in Singapore and Australia,
  2. renewal of Singapore public sector contracts at lower rates, and
  3. widened Airtel losses. Excluding Airtel, core net profit would have fallen 3% y-o-y.
• Results are below expectations, driven by higher finance charge at Airtel and 1QFY20 one-off loss from provisions for derivative liabilities and listing expenses.

Stock Impact

Group Consumer: Defending leadership in Singapore amid rising competition.

• Singapore (market share: 49.5%) mobile revenue fell 5% y-o-y (flat q-o-q) on declining voice and roaming call usage, partly offset by higher equipment sales. Competition was intense with the entry of new mobile virtual network operators (MVNOs) to the market.
• SingTel added 35,000 post-paid subscribers thanks to GOMO’s SIM-only offering but ARPUs fell 13% y-o-y to S$40/month on higher handset subsidy. Prepaid subscriber fell 15,000 while ARPUs fell 7% y-o-y to S$17/month on lower local and IDD voice revenue. EBITDA fell 4% y-o-y to S$188m, keeping a tight lid on cost structure.
• For Australia, mobile revenue grew 7% y-o-y on higher take-up of premium handset (equipment sales rose 26% y-o-y). Optus added 51,000 post-paid subscribers in the quarter driven by population coverage of 97%. That said, post-paid ARPU fell to A$38 vs A$42 in 1QFY19 due to a higher mix of SIM-only customers and heightened data price competition.
• EBITDA rose 9% y-o-y thanks to higher equipment sales and higher NBN migration revenues. Excluding NBN migration revenue, underlying EBITDA would have been down by 4% y-o-y.

Group Enterprise: Lower margin due to change in revenue mix.

• Top-line fell 5% y-o-y on the back of lower legacy services (data & internet: -7% y-o-y, fixed voice: -17% y-o-y) and weak business sentiment in Australia. This was partly cushioned by stable ICT revenue (+0.3% y-o-y).
• EBITDA and EBITDA margin fell 7% y-o-y and 0.6ppt due to price pressure from renewal of major government contracts, partly offset by a higher ICT sales mix. For the quarter, ICT accounting for 47% of revenue (1QFY19: 45%).

Group Digital Life: Growth in revenue resumed on Videology’s contribution.

• Revenue from digital marketing rose 17% y-o-y in 1QFY20 with the inclusion of Videology and revenue growth in Amobee's programmatic platform business. Negative EBITDA narrowed 50% y-o-y to S$12m with the inclusion of technology licensing fee from iTV.

Regional Mobile Associates: Adversely impacted by Airtel.

• Associate PBT fell 14% y-o-y to S$335m as a result of Bharti’s pre-tax loss of S$162m (vs pre-tax loss of S$63m in 1QFY19).
• Apart from higher finance charges, there were S$109m in one-off expenses at Airtel. This was due to provision for derivative liabilities relating to customary indemnities given to some investors of Airtel Africa and expenses relating to its right issue and IPO. Excluding this, associate pre-tax profit was S$454m (+10% y-o-y). This was attributable to Telkomsel’s robust data growth as the market recovers from the value destruction last year.

Earnings Revision / Risk

• Cut FY20 and FY21 net profit forecasts by 13% and 7%, adjusting for higher network cost, higher finance charges and importantly, the prolonged period of heightened price competition in India.
• Positively, management guided that Airtel experienced a second consecutive quarter of mobile service revenue growth in India.
• We maintain a 17.5 S cents net DPS assumption for FY20.

Valuation / Recommendation

• Downgrade to HOLD with a lowered target price of S$3.32 in tandem with the earnings downgrade. Our fair value is based on DCF (required rate of return: 6.25%, growth: 1%).
• SingTel's share price has rebounded 13% ytd, trading at mean EV/EBITDA of 14x, well reflecting heightened competition in the consumer space in Singapore and Australia.
• Entry price: 3.00.

Source: UOB Kay Hian Research - 13 Aug 2019