• SINGTEL (SGX:Z74) will focus on:
  1. defending its market share in both Singapore and Australia;
  2. driving the digital businesses; and
  3. keeping a tight lid on costs via digitisation.
• We came away from a recent meeting more sanguine on the Singapore market but this will likely be offset by weaker Optus enterprise and digital services.
• Maintain HOLD.

What’s New

Signs of stabilisation in Singapore…

• We came away from a recent meeting more sanguine on SingTel, given relatively stable operating parameters in Singapore, albeit at early stages. One of the oldest mobile virtual network operators (MVNO) - Zero Mobile (launched in Dec 17) has discontinued mobile offerings in Singapore after a period of intense price competition in the country. As a result, we believe existing MVNOs may attempt to revamp their offerings or potentially exit the market to avoid prolonged cash burn.
• In addition, TPG has extended its free trial for its 300,000 subscribers by another six months with commercial launch expected by 4Q20. TPG may also face difficulty in gaining market share within the SIM-only segment, given:
  • incumbents’ existing grip on premium customers; and
  • the proliferation of MVNOs in Singapore – to fill the space where TPG is targeting.
• All these seem to suggest that TPG may have to grapple with higher customer churn once the company starts to charge for mobile services.

….to be offset by challenging enterprise business for Optus.

• We expect the enterprise business segment to remain weak into 2HFY20 as compliance-related businesses have slowed down substantially for financial institutions in Australia. This is expected to be partly offset by the resumption of public-sector jobs in Singapore as most contract renewals with the government have been renegotiated, albeit at lower margins.
• SingTel’s digital marketing arm is expected to face near-term headwinds amid more cautious spending by Amobee's clients and a drop in social media and e-mail revenue streams. As such, we expect the group to continue to focus on driving programmatic advertising (57% of digital revenue in 2QFY20) and e-wallet business (SingTel’s Dash).

Synergies in a digital banking with existing businesses.

• SingTel has teamed up with Grab to apply for a Digital Full Bank (DFB) license. It is estimated that there are currently 2m underbanked Singaporeans (out of 5m total population) and this is an opportunity for future digital banking licensees. The successful bidders will be announced by mid-20 and they are given 12-24 months to meet the requirement of minimum S$1.5b paid-up capital.
• The digital banks are expected to start business by earliest mid-21.

Stock Impact

2020 outlook: Cautiously optimistic.

• SingTel will focus on:
  • defending its market share in both Singapore and Australia;
  • drive digital businesses; and
  • keeping a tight lid on costs via digitisation of its traditional operating model.
• All in all, SingTel guides for stable top-line and EBITDA for FY20 amid competition in the consumer segment and weak enterprise business outlook. Management also expects dividends from regional associates to amount to S$1.2b.
• We note that operationally, Airtel may successfully narrow its losses in 2HFY20, given concerted efforts to raise mobile tariffs in India.

Mobile tariff hike potentially a turning point for Airtel…

• SingTel’s Bharti Airtel had unveiled new prepaid mobile plans in Dec 19 with price hikes ranging from 15% to 52%. Based on our sensitivity analysis, the higher turnover arising from Airtel’s tariff hike (we modelled in an average ASP hike of 33% y-o-y) could lift SingTel’s FY20-21 net profits by 2% and 4% respectively.

…although in the near term, Airtel will have to pay up for outstanding gross revenue to the Indian government (due 24 Jan 20).

• While we view the mobile tariff hike positively, near-term sentiment may be dampened by a recent capital raising exercise of US$3b by Bharti. Of the US$3b, a US$2b equity raising exercise has be carried out to approved shareholders with a floor price of Rs452.09 (S$6.32) each – SingTel is not a party. The balance of US$1b capital will be debt funded. This fund will be channelled towards paying Airtel’s Rs355.9b (~S$6.8b) adjusted gross revenue (AGR) payable to the Indian government by 24 Jan 20.
• In terms of due installments, it is still uncertain whether the government would allow spreading them over five or ten years. We expect the court to rule on the review petition by the end of this month. To recap, SingTel had made S$1.4b provision for AGR payable to the Indian government in its 2QFY20 earnings.

5G spectrum to be allocated by mid-20, with Singtel a potential beneficiary.

• The Infocomm Media Development Authority (IMDA) is expected to allocate 5G spectrum by mid-20. There will be two 5G nationwide networks to hold the 3.5 GHz spectrum and mmWave for national coverage, and two 5G localised networks to hold only mmWave to cater for industry use.
• We expect the two 5G nationwide networks to include SingTel and a consortium of multiple mobile network operators (MNOs) such as StarHub (SGX:CC3), M1 and TPG. The MNOs are expected to submit their bids by 17 Feb 20.

Higher capex as telcos enter the next 5G investment cycle.

• We expect additional S$1b- 2b capex as the Infocomm Media Development Authority (IMDA) aims for 50% population coverage by end-22 and nationwide coverage by 2025. Assuming a capex budget of S$1b- 2b per 5G network operator, we expect SingTel’s capex intensity to increase to 14-16% for FY20-21 (FY19: 10%; FY18: 13%), and ease to high-single-digit thereafter. Having said that, the rollout of 5G could reduce network cost by 10-15% through network sharing.

Earnings Revision / Risk

• No change to our earnings forecasts.

Healthy dividend yield of 5.4% for FY20.

• Barring unforeseen circumstances, we believe management could maintain ordinary dividend at 17.5 S cents for FY20. This translates into a net dividend yield of 5.4%.
• Management reiterated its stance of: balancing shareholder’s return with a desire to stay within investment grade – for funding cost purposes.

Valuation / Recommendation

• Maintain HOLD with unchanged DCF-based target price, or 13.9x FY20F EV/EBITDA.
• At our target price, the stock trades at its mean 5-year EV/EBITDA mean of 14.2x. This reflects fairly stable earnings pace and higher 5G capex intensively in the next three years.
• Entry price is S$3.00.

Source: UOB Kay Hian Research - 15 Jan 2020