• We estimate HOOQ’s liquidation may remove net loss of S$85m in FY21F.
• We view a potential sale of Optus towers positively as it could strengthen SingTel (SGX:Z74)’s balance sheet and possibly help it to keep FY21F DPS at 17.5 Scts.
• Reiterate ADD on 8% lower target price of S$3.40.

HOOQ Liquidation Will Ease GDL Losses

• Last Friday, SingTel announced HOOQ Digital, a video-streaming service under Group Digital Life (GDL), has filed for liquidation as it has not been able to grow sufficiently to provide sustainable returns or cover rising content costs.
• We view this development positively, as it has always been difficult for HOOQ to succeed in the market given the plethora of video-streaming applications (e.g. Netflix, Viu, Disney+) and widespread piracy in Asia.
• While SingTel will likely have to provide a one-off impairment for its HOOQ investment, the liquidation will remove S$134m (based on annualised 1HFY20) in LBIT or an estimated S$85m net loss from SingTel’s P&L, based on its 76.5% effective stake.

Planning to Sell Australian Towers for at Least S$1.8bn?

• The Australian Financial Review’s Street Talk yesterday reported that SingTel is planning to sell Optus’ towers, which may be worth at least A$2bn (S$1.8bn), with the auction to take place in 1HCY20 (subject to change due to Covid-19). If true, we view this new development positively.
• After spending heavy capex in Australia in FY15-18 to improve its 4G network and rollout regional coverage to better match Telstra, the tower sale proceeds could help to pare debt and fund Optus’s 5G network rollout, without further burdening the balance sheet.
• While Optus would incur extra tower leasing costs, this may be offset by lower tower opex, removal of tower depreciation and interest cost savings, especially if it is able to lock in a favourable leaseback rate for the next ten years given the current low interest rates.
• If the proceeds are used entirely to pare debt, we estimate SingTel’s proforma 3QFY20 net debt/EBITDA will ease from 2.0x to 1.7x, and possibly help it sustain a DPS of 17.5 Scts for FY21F.
• A potential risk of this deal is the opening up of the towers to external tenants such as Vodafone Hutchison Australia-TPG, which may help the third player catch up to Optus’s network coverage/quality.

Reiterate ADD; SOP-based Target Price Lowered by 8% to S$3.40

• We cut SingTel's FY20-22F core EPS by 2-4% to reflect:
  1. lower international roaming revenue on Covid-19,
  2. more pessimistic outlook for Singapore/Optus Enterprise and
  3. weaker associate currencies vs. S$,
  partly offset by the removal of HOOQ losses and more bullish consensus earnings forecasts for Bharti.
• Our Target Price is lowered by 8% to S$3.40 after the earnings cut and updating for revised fair values for AIS, InTouch, Telkomsel and Bharti (after stake dilution).
• SingTel's FY3/21F EV/OpFCF of 14.2x is at a 10% premium over the ASEAN telco average but at 0.8 s.d. below its 12-year mean (low: 10.7x in Oct 2008).
• Assuming 17.5 Scts FY20-22F DPS, yields are attractive at 6.9% p.a.
• Potential re-rating ings recovery in FY21F.
• Downside risk: keener competition in its markets.

Source: CGS-CIMB Research - 31 Mar 2020