• SingTel's FY20 core earnings were in line, with COVID-19 impact buffered by cost savings. We expect core earnings to rebound in FY21, driven by stronger associate contributions and further cost-outs.
• Valuations at -1.5SD post-GFC EV/EBITDA mean (-2SD from 5-year mean) are backed by dividend yields exceeding 5%.
• BUY, new SOP-derived Target Price of SGD3.40 from SGD3.30, 35% upside after rolling forward our base year and updating key associates’ valuations.
• Key risks: weaker-than-expected earnings, competition, dividend surprises and capex.

SingTel's 4QFY20 in Line

• SingTel (SGX:Z74)'s 4QFY20 core earnings fell 15% y-o-y, largely on weaker consumer revenue from the maiden impact of COVID-19, partially offset by stronger associate contributions and lower digital losses. The downside was also compounded by the AUD slide (-2% q-o-q/-6% y-o-y). This brought FY20 core earnings to SGD2.36bn, at 98% of our/Street forecasts.

Core Earnings Grew 8% Q-o-q

• SingTel's core earnings grew 8% q-o-q from stronger associate contributions, lower tax expense and digital losses. However, final DPS was surprisingly cut to 5.45 cents which took FY20 DPS to 12.25 cents (FY19: 17.5 cents), reflecting an 81% payout.
• Management cited the need for financial headroom, given uncertainties related to the pandemic and 5G capex.
• SingTel is withholding FY21 guidance until better clarity emerges on the operating environment.
• Post results, we lower SingTel's FY21-22F core earnings by 1-3%, mainly to factor in larger-than-expected weakness in mobile ARPUs for Singapore and Optus. FY23F core earnings have been introduced.
• FY21-22F DPS is also lowered to 14 cents, vs 16 cents previously.

Impact From COVID-19 to be Largely Felt in 2Q20

• Singapore mobile service revenue fell 12% y-o-y (-10% q-o-q) in 4QFY20, as roaming revenue slumped 36%, coupled with lower sales of prepaid packs. Consequently, post-paid and pre-paid ARPU narrowed 12-15% q-o-q to quarterly lows of SGD33.00 and SGD14.00. EBITDA, however, rose 5.1% on strong cost management and government wage credits. Optus’ mobile revenue contracted by 5.4% y-o-y (-1.1% q-o-q) from higher SIM-only plan adoption, data price competition and, to a lower extent, roaming weakness, while EBITDA fell 22% y-o-y (-20% q-o-q).
• We expect the full brunt of roaming revenue weakness from lockdowns imposed globally (including Singapore) to be felt 2Q20.

Recovery in Associates Intact

• SingTel's associate contributions rose 25% q-o-q, led by Telkomsel and reduced losses at Airtel. Telkomsel’s contribution grew 7.3% q-o-q vs a 1% rise in revenue, while EBITDA advanced 14% y-o-y with the implementation of IFRS 16. With the full-quarter impact of the industry-wide re-pricing last December, Airtel’s ARPU climbed by a further 14% q-o-q to INR154. We believe the extended lockdown in India may crimp 1QFY21 (Jun) revenue momentum, due to the high dependence on traditional recharge methods.

Source: RHB Invest Research - 29 May 2020