We  keep  our  NEUTRAL  rating  on  SingTel  based  on  a  revised  SOPbased  TP  of  SGD3.93  (<1%  upside)  (from  SGD3.82).  This  follows  a marginal upgrade of our FY16 core earnings estimate and incorporating the latest valuations of its listed associates. While we are  slightly more upbeat  on  Optus  given  the  revenue  turnaround,  SingTel  continues  to face  headwinds  in  its  domestic  consumer  and  enterprise  businesses from rivals capitalising on the NBN network.  

Roaming  weakness  lingers  on.  There  were  no  major  surprises  from SingTel‟s  results call  following  the  release  of  its  2QFY15  (Mar)  results yesterday.  Sing  mobile  revenue  growth  decelerated  to  1.4%  YoY  in 2QFY15  from  2.4%  YoY  in  1QFY15,  as  it  continued  to  grapple  with structural  roaming revenue  weakness and the higher take-up of shared plans which  are ARPU-dilutive.  SingTel‟s  roaming revenue makes  up a fifth of its mobile revenue  vs 10-15% for  its peers.  Management expects Singapore  mobile  revenue  traction  to  improve  from:  i)  better  data experience  on  new  devices,  which  should  translate  into  higher  data consumption, and ii) a stronger take-up of the new 4G Wifi Combo plans.   

Stay tuned  to  Optus.  Optus highlighted plans to grab a "fair share‟ of the Australia mobile business now that its 2-year transformation journey has  been  completed.  The  focus  would  be  on  offering  a  differentiated product that meets the needs of its data customers. We think it is making good headways for  the  MyPlan, which contributed to the turnaround in 2QFY15 revenue. While management expects competition in the market to  remain  fairly  intense,  it  is  confident  that  the  increase  in  4G  street coverage population  to 90% by end-1Q15  (from 83% currently)  will avail bigger revenue opportunities with the coverage gap with the incumbent effectively plugged.    

Group  Digital  Life  (GDL)  losses  to  intensify .  Management  expects additional  investments  into  mobile  commerce,  video  and  analytics  to further  dilute  group  EBITDA  in  the  medium  term  with  EBITDA  losses from  the  GDL business now guided  at  SGD200m-250m in FY15,  from  a loss  of  SGD170m  in  FY14.  GDL  EBITDA  losses  totalled  SGD95m  in 1HFY15 (2QFY15: -SGD50m), implying a higher EBITDA loss run-rate of SGD78m/quarter for 2HFY15.   

 

Key Takeaways From Results Call 
SingTel‟s 1HFY15 results conference call was  chaired by its Group CEO, Chua Sock Koong,  with  the  presence  of  the  senior  management  team  including  Jeann  Low (Group  CFO),  CEO  of  Consumer  Singapore,  Yuen  Kuan  Moon,  CEO  of  Group Enterprise  (GE),  Bill  Chang,  CEO  of  Consumer  Australia/Optus,  Allen  Lew,  CEO International,  Mark  Chong  and  CEO  of  GDL,  Jonathan  Auerbach.  There  were  no surprises  with  key  questions centred  on  its  revenue  guidance  and  prospects  of  its mobile businesses in Singapore and Australia.

Singapore mobile business 
Mobile  revenue  growth  decelerated  to  1.4%  YoY  in  2QFY15  from  2.4%  in  June quarter,  due  in  part  to:  i)  structural  roaming  revenue  weakness,  ii)  voice/SMS cannibalisation,  and  iii)  ARPU  dilution  from  data  only  and  shared  plans.  The extended roaming revenue pressure is not a surprise given SingTel‟s larger exposure to roaming revenue at 25% of mobile revenue vs 10-15% of its peers, making it more susceptible  to  travellers  opting  for  local  SIM  cards  when  abroad  or  utilising complementary  Wifi  services.  Management  expects  revenue  to  be  supported  by: i)  better  data  experience  on  new  devices  which  should  translate  into  higher consumption  of  data,  ii)  a  stronger  take-up  of  the  new  4G  Wifi  Combo  plans(launched on 19 Aug),  and iii)  a  higher take-up of its unlimited data roaming plans. Although  it‟s  still early days, SingTel  said it observed  a noticeable  increase in  dataconsumption among users of  the  iPhone  6  and Samsung  Note 4  (both Category 6 devices), which it believes should contribute towards a stronger ARPU uplift.

Prepaid  net-adds  accelerated  to  36k  from  10k  in  2QFY15  despite  the  new  ruling limiting SIM card ownership,  as  SingTel had been  aggressively pushing for  top-ups. This  compares  with  the  100-120k  net  deletions  posted  by  StarHub  (STH  SP, NEUTRAL, TP: SGD4.20) and M1 (M1 SP, BUY, TP: SGD4.30)  during the quarter. SingTel  netted  over  50k subs  for the  4G  Combo  plans  within the  first month of its launch, which is commendable, in our view. Fixed broadband revenue remains under pressure,  down 3% YoY in 2QFY15 and 6% in 1HFY15, due to price competition in the market.

The  number  of  postpaid  subscribers  on  tiered  data  plans  expanded  to  59%  in 2QFY15 from 54% in the preceding quarter, with 19% of these subscribers exceeding their monthly data caps. We expect the percentage of postpaid subscribers on tiered plans to hit 70% by end-2015 and 85% by  end-2016, driven by stronger data takeups and a higher adoption of 4G/LTE devices.

 Stay tuned to Optus 
The  queries  on  Optus  were  addressed  by  Allen  Lew,  who  joined  CEO  of  Optus(replacing Paul O‟ Sullivan)  after a  2-year  stint as CEO of Group Digital Life  (GDL),and after having succesfully led the Singapore business as CEO previously.  Mr  Lew articulated plans  for  Optus to grab  a  "fair  revenue and net-adds share of the Australian  mobile  business"  now  that  it  has  completed  the  2-year  transformation initiatives.  The focus  going forward  would be on  offering a differentiated  product  to meet the needs of  its data  customers. We think Optus is making good headways  for the MyPlan - a first in the market to offer shared data allowances onmultiple devices-  which  has  contributed to  the  strong pick-up  in mobile net-adds  to 65k in 2QFY15from  16k  in  the  previous  quarter,  and  arresting  the  quarterly  declines in  its  mobile revenue  (+4%  YoY  in  AUD  terms  in  2QFY15).  Excluding  the  writeback  of  base station rentals in the previous year, Optus‟ selling and administrative expenses fell 5% YoY and EBITDA improved 4.4% YoY on opex efficiency.  While management expects mobile incumbent, Telstra (TLS  AU,  NR) and Vodafone Hutchison  to  remain  vigilant  of  the  change  in  market  dynamics  and  respond accordingly, Optus is  confident  that  the increase in 4G street coverage population to 90%  by  end-1Q15  from  83%  currently,  will  avail  greater  revenue  opportunities  via access to a bigger addressable market.

GDL losses to intensify in the medium term
Management  said  the  revised  guidance  on  the  GDL  business  reflects  the consolidation  of  Adconion  and  Konterra  (acquired  in  3Q14),  and  further  start-up losses  from  investments  in  mobile  commerce,  video  and  analytics  in  the  coming quarters.  GDL revenue  surged  142% YoY in 2QFY15 and 97% in  1HFY15, largely driven  by  the  191%  YoY  rise  in  digital  advertising  revenue.  That  said,  its  EBITDA losses  expanded  26%  YoY  to  SGD50m  in  2QFY15  (1HFY15  EBITDA  loss  of SGD95m).  

It revised the guidance for the GDL business to "re venue to exceed SGD300m" from "revenue  to  increase  by  50%  previously"  and  "EBITDA  losses  to  increase  to SGD200m-250m" from "negative EBITDA to decrease by 20%". This implies further EBITDA dilution from the GDL business in the medium term.

Guidance 
With the exception of the updated guidance on the GDL business, management has reaffirmed the earlier FY15 guidance (see Figure 4) of: i) stable consolidated revenue and EBITDA,  ii) Sing  mobile revenue to grow by "mid-single digit", iii) Optus revenue to  decline  by  "low  single  digit",  and  iv)  group  capex  at  SGD2.3bn  (SGD900m allocated for  Singapore  and  SGD1,400m  for Optus).  The capex excludes AUD900m payment for Optus‟ 700MHz spectrum in 2015.

Risks
The  key  risks  to  our  forecasts  are:  i)  a  stronger  SGD,  ii)  rising  competition  in  key markets, and iii) higher-than-expected subscriber acquisition cost.

Maintain  NEUTRAL.  We  raise  our  SOP  valuation  slightly  to  SGD3.93  (from SGD3.82) after updating the valuations of its  listed associates, factoring in our recentTP  upgrade  on Advanced Info Services (ADVANC TB, NEUTRAL, TP: THB249.00)and  raising  our  FY16  core  earnings  estimate  (by  a  marginal  1.5%)  to  build  in  the stronger  revenue  recovery  for  Optus  in  2015.  SingTel  remains  a  NEUTRAL notwithstanding  our  slightly  more  upbeat  view  on  Optus  due  to  competitive headwinds for its consumer and enterprise businesses in Singapore,  where its rivals are  bent  on  taking  additional  share,  capitalising  on  the  next  generation  broadband (NBN) network.  

Source: OSK-DMG