Singapore Telecommunications Limited – Remain vested for yield and recovery May 16, 2019

PSR Recommendation: ACCUMULATE Status: Maintained
Target Price: SGD3.31
  • EBITDA & net profit were within expectations. Full-year net profit was down 44% YoY. Excluding one-off gains in FY18 net profit would have been down 14% YoY.
  • Associates Airtel continued to drag down earnings, expanding its losses to S$98mn. Telkomsel improved 2% YoY with a profit of S$223mn. Globe’s earnings surged 53% YoY on the back of higher data revenue and increase demand for internet services.
  • Digital business is gaining traction, revenue spiked 33% YoY and accounts for 6% of revenue.
  • We roll over our valuations to FY20e. Maintain ACCUMULATE with a higher TP of S$3.31

The Positives

+ Going digital to optimise costs further. As part of the cost optimisation strategy, Singtel invested in self-service channels to help reduce customer acquisition costs. An example is the launch of GOMO, a pure digital product with no physical stores and call centre support.  We believe GOMO have aided 32k post-paid subscriber growth QoQ. Singtel have also been rationalising content portfolio, optimising headcount, standardising & simplifying price plans and shutting down legacy networks & systems. This has led to a cost saving of S$541mn in FY19. We believe these cost savings will be reinvested to further optimise Singtel’s operations. We expect a cost saving of S$490mn in FY20e.

+ Digital business gaining traction. Group Digital life (GDL) revenue spiked 33% YoY and accounts for 5% of total revenue in 4Q19. Growth is mainly attributed to Amobee and its programmatic platform business and also the incorporation of Videology operations. EBITDA loss for GDL is at S$92mn in FY19. Management guided mid-single digit increase in Amobee’s revenue and improvement in EBITDA in FY20e.  

 

The Negatives

– Associates still weak. Airtel losses are at S$98mn. We believe the recent rights issue would strengthen Airtel’s balance sheet to continue its fight against Reliance Jio. Telkomsel profit improved 2% YoY, we believe recovery is on track as competition is rationalising after the SIM re-registration episode. Associates weak performance was cushioned by a 53% surge in Globe’s profits. The surge is mainly due to the monetisation of data and increasing demand in internet services.

– Erosion of enterprise margins. Group enterprise EBITDA fell 16% YoY due to a higher mix of ICT contribution. ICT services typically commands lower margin compared to core carriage services. There are major contracts that are up for renewal with downward price revisions. Over in Australia there was a short term freeze in the government sector due to federal and state elections. These factors led 4Q19 EBITDA margin to shrink 16% YoY to 23.2%.

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Alvin Chia
Research Analyst
Phillip Securities Research Pte Ltd

Alvin covers telecommunication and technology sector.

He graduated with a bachelor of commerce, majoring in Accounting and Finance from Monash University.

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