• Cut SingTel's FY21F/22F earnings by 10%/6% on drop in roaming and prepaid revenue, and weak AUD.
• Trim SingTel’s FY21F DPS by 6% to 14Scts conservatively.
• Trading at dividend yield of 5.4% (near +2S.D. of mean) implies low downside risk.

Singtel Offers 8% Upside Potential and 5.4% Yield

• SingTel (SGX:Z74)’s FY21F earnings are likely to be stable under our base case scenario of COVID-19 crisis lingering throughout 2020. More importantly, the stock offers 5.7% dividend yield in FY21F (March YE) even on our reduced estimate of 14Scts dividend per share (DPS). The yield of 5.7% is +2 standard deviation (S.D.) of its mean over the last 15 years, implying low downside risk.
• Based on the latest market price of its associates, holding company (HoldCo) discount has also widened to 25% vs. 15% average over the last-4 years.

Assuming COVID-19 Crisis Lingers Throughout 2020

• We cut FY21F/22F earnings by 10%/6% in total. This stems from roaming revenue drop in Singapore, Weak Aussie Dollar and higher regulatory fee at Bharti.

Roaming revenue could drop sharply in FY21F, leading to 6%/3% cut in FY21F/22F earnings.

• A substantial decline in inbound and outbound travel emanating from COVID-19 situation is likely to result in a significant drop in roaming revenue. Roaming as a percentage of mobile services revenue in Singapore and Australia represent 20% and 6% respectively.
• We project revenue from roaming to drop by at least 50% in FY21F. This leads us to cut SingTel’s FY21F/22F earnings by 6%/3%.

~10% drop in Australian Dollar (AUD) leads to another 2.5% cut in FY21F/22F earnings each.

• Last week, the Australian Dollar was ravaged, plummeting to a 17-year low against the greenback on heightened concerns over a virus-induced global recession. Following suit, the Australian Dollar against the Singaporean Dollar hit a record low to close at S$0.83.
• As Optus contributes almost one-quarter of group earnings, every 10% drop in AUD has 2.5% adverse impact on SingTel’s earnings. In terms of earnings sensitivity, each 10% drop in Indonesian Rupiah and Thai Baht will adversely impact SingTel’s earnings by 3.5% and 1.5% respectively.

Bharti’s pre-tax contribution could be lower-than our previous estimates, leading to another 2% cut in FY21F/22F earnings each.

• On 18 March, the apex court dismissed the adjusted gross revenue (AGR) dues determined by the Indian telcos through a self-assessment exercise. Following the dismissal, the court ordered the operators to settle the principal together with interest and penalties. The telecom regulator has pegged the AGR dues at INR440bn, out of which INR180bn has been paid. Hence, Bharti has only settled 41% of the outstanding AGR dues.
• We assume that the apex court will allow a 20-year staggered payment on a bigger amount as proposed by the telecom regulator versus our earlier expectation of 10-year payments on a smaller amount. We also assume a 10% interest rate to determine the annual payments for the forecast period. The court will convene in two weeks’ time to pronounce its judgement on a 20-year staggered payment schedule.
• Vodafone-Idea Limited (VIL)’s AGR dues at INR583bn are approximately equivalent to 4x of its market capitalisation. Given VIL’s already stretched balance sheet, Bharti paired with Reliance Jio and should continue to gain market share.

Trim Singtel’s FY21F DPS by 6% to 14Scts Conservatively

• In our earlier estimate, we had projected the FY20F-22F free cash flows (FCF) to support 15Scts DPS. However, due to the plunge in AUD paired with reduced associate contributions, FCF from the core business is likely to decline to S$1.68bn in FY21F from S$2.1bn in FY20F. Approximately S$0.5bn of interest expenses also needed to be factored.
• Dividends from associates are anticipated to hover at S$1.24bn, a 5% reduction from our previous estimates and a 12% reduction from S$1.4bn received in FY19 due to potential weakness in Indonesian Rupiah and 5G capex cycle. Therefore, S$2.4- S$2.2bn (14.9-13.3Scts per share) should be available to distribute to the shareholders in our view.

Source: DBS Research - 26 Mar 2020