• SingTel's core net profit could be S$590m-610m in 3QFY3/20F (-11 to -13% y-o-y). This is largely in line with our FY20F forecast but below Bloomberg consensus’.
• 2019-nCoV outbreak may hit FY20F/21F core EPS by only -0.9%/-0.8%.
• Maintain ADD. Our SOP-based target price of SGD3.70 would rise by 3% if we factor in the Street’s 20% higher target price for Bharti since Dec 2019.

3QFY3/20F Core Net Profit Likely Fell Y-o-y, Flat Q-o-q

• SingTel (SGX:Z74)’s 3QFY3/20F results will be released on 13 Feb. We expect S$590m-610m core net profit (ex-investment income from Airtel Africa), or 11-13% y-o-y decline, led by Bharti, Telkomsel, Singapore and Optus.
• Q-o-q, we see flat earnings, held back by softer profits for all key associates. Still, 9MFY20F core net profit should be broadly in-line at 70-72% of our FY20F forecast, but miss Bloomberg consensus’ estimates at 64-66%.

Singapore & Optus Earnings Still Soft Y-o-y But Could Improve Q-o-q

• We expect Singapore 3QFY20 core net profit to fall 13-15% y-o-y due to weaker mobile revenue, Enterprise EBITDA margin erosion and higher depreciation, but up 9-11% q-o-q due to seasonally-higher operating revenue (device sales, Amobee).
• We estimate 17- 19% y-o-y lower Optus core net profit from higher depreciation and interest cost, plus 5.5% weaker A$ vs. S$.
• We see 10-12% q-o-q growth on higher revenue (positive seasonality, Aug 2019 tariff hikes), though the timing of NBN migration revenues can be uncertain.

Wider Bharti Core Losses But Underlying Performance Is Improving

• Associate contributions in S$ terms may fall 6-8% y-o-y/12-14% q-o-q in 3QFY20F.
• Bharti’s reported core loss widened 24.4% q-o-q (narrowed 14.6% y-o-y) on higher taxes. However, its revenue/pretax losses improved by 3.9%/27.4% q-o-q, with the full effects from the Dec 2019 tariff hikes to be seen only next quarter.
• Telkomsel may disappoint as we expect its net profit to ease 1-3% q-o-q (-6 to 8% y-o-y) from a pick-up in competition in 3Q19 (which has since cooled).
• Globe’s reported net profit fell seasonally by 18.4% q-o-q (+15.3% y-o-y).

Manageable Earnings Impact From 2019-nCoV Outbreak

• International roaming forms 18-20% of SingTel Singapore’s mobile revenue. If the 2019 coronavirus (2019-nCoV) outbreak lasts for six months and international roaming traffic drops by 50%, we estimate SingTel’s FY20F/21F core EPS could be hit by a manageable -0.9%/-0.8%, mitigated by its diversified operations.

Maintain ADD

• We note the Street’s target price for Bharti (which we use for our SingTel SOP-based valuation) has risen 20% since Dec 2019 to Rs584. If we factor this in and the diluted 32.5% stake in Bharti (previous: 35.2%) after its recent share placement exercise, SingTel’s SOP-based fair value would rise by S$0.10 (+3%).
• SingTel trades at a FY3/21F EV/OpFCF of 16.2x, which is at a 23% premium over the ASEAN telco average, supported by decent 5.2% yields p.a.
• Potential re-rating catalyst: y-o-y earnings recovery from 1QFY21F.
• Downside risk: keener competition in its operating markets.

Source: CGS-CIMB Research - 7 Feb 2020