• SingTel’s FY21/22F core EPS could recover 15.1%/7.0% y-o-y, led by a rebound in associate earnings, partly offset by lower Singapore and Optus earnings.
• We expect SingTel to keep DPS at 17.5 Scts p.a. in FY21-22F. Net debt/ EBITDA to remain below 2.0x, based on our estimates.
• Maintain ADD with a 3% higher SOP-based target price.

Group Core EPS to Recover in FY3/21F Led by Associates…

• After falling 35% during FY17-20F, we see SINGTEL (SGX:Z74)’s core EPS recovering 15.1%/7.0% y-o-y in FY21/22F, led by a rebound in associate earnings (+40.6% /+22.1%).
• Its share of Bharti’s FY21/22F earnings could improve to S$1m/S$259m (FY20F: -S$402m). On 3 Dec, Indian telcos (including Reliance Jio) raised tariffs (by up to 40%) for the first time since 2016.
• We also see Telkomsel’s earnings rising 7.9%/8.6% y-o-y, while AIS’s earnings should grow 11.4%/13.4% y-o-y in FY21/22F.
• If Bharti’s losses do not improve, SingTel’s FY21/22F core EPS would ease 0.9%/2.2% y-o-y.

…partly Offset by Lower Singapore & Optus Earnings

• We expect SingTel's Singapore core net profit to fall 11.3%/10.0% y-o-y in FY21/22F on lower mobile revenue (intense competition) and Enterprise margin erosion. We have factored in 7.5% p.a. erosion in the postpaid base average revenue per user (ARPU, ex-roaming). A -5%/-10% p.a. hit would raise/lower SingTel’s FY19-22F core EPS CAGR to 3.5%/2.8% (base case: +3.2%).
• For Optus, we project an 8.2%/19.7% y-o-y decline in core net profit. We see National Broadband Network (NBN) migration revenue dropping in FY21/22F and higher NBN-related traffic cost, partly buffered by higher mobile revenue (+2.4%/ +1.3%) as competition eases. There is potential upside to our Singapore and Optus earnings forecasts if
  1. mobile competition and
  2. cost savings are better-than-expected.

Can Singtel Sustain DPS Into FY21-22F?

• We believe SingTel will keep DPS at 17.5 Scts for FY21/22F.
• Net debt/EBITDA rises from 1.6x at end-FY19 to a still manageable 1.9/1.8/1.8x at end-FY20/21/22F, based on our estimates. The key risks are the occurrence of major cash outflow events and/or FY20- 22F earnings coming in much lower-than-expected.
• Assuming earnings are in line, we estimate SingTel has S$1.2bn of extra debt headroom if end-FY21F net debt/EBITDA is capped at 2.0x.
• SingTel can also raise funds via the sale of non-core assets [e.g. 25% stake in NetLink NBN Trust (SGX:CJLU) (S$984m), 21.7% stake in Singapore Post (SGX:S08) (RM552m)], if needed.

Maintain ADD With 3% Higher SOP-based Target Price

• We have raised our FY20-22F core EPS by 2-3% for lower costs at Singapore and Optus and higher share of Bharti earnings. Correspondingly, our SOP-based Target Price has increased 3%.
• SingTel trades at a FY3/21F EV/OpFCF of 16.4x, which is at a 18% premium over the ASEAN telco average, backed by above-average 5.1% yields p.a.
• Potential re-rating catalyst: earnings recovery from 2HFY20F.
• Downside risk: more competition in Australia, India and Singapore.

Source: CGS-CIMB Research - 3 Dec 2019