• EBITDA met our estimates while NPAT was hurt by Airtel’s exceptional item. Excluding exceptional item, NPAT would have fallen 15% YoY and within our expectations. Airtel was impacted by an adverse court ruling against the industry’s definition of adjusted gross revenue and recorded a provision of S$5.5bn (Singtel’s pre-tax share is S$1.9 bn).
• Stronger performance in regional associates especially for Globe & AIS. Telkomsel returned to sequential quarter growth, Airtel narrowed losses. Enjoyed first YoY PBT growth in 3yrs.
• Group enterprise weak due to challenging business environment and slowdown in Australia.
• Maintained ACCUMULATE with a lower TP of S$3.31 (prev. S$3.45). We revised FY20e EBITDA and NPAT downwards by 9%/56% due to the results and change in guidance.

The Positive

+ Regional associates returning to growth. Regional associates typically contribute ~47% of Singtel earnings. Associates enjoyed its first YoY growth (+34%) in 3 years. The growth was due to a better performance from Globe, AIS and Telkomsel. Globe and AIS grew on robust data consumption. Telkomsel returned to sequential quarter growth despite competition. Airtel managed to reduce its finance expense burden and narrow its losses through the African IPO proceeds. Both Telkomsel and Airtel are operationally stronger, with competition turning more rational in pricing.

The Negatives

– Up-front pain from Airtel’s provision.  The Supreme court ruled that Airtel, Vodafone Idea (VI) and other operators will have to pay a combined US$13bn in Adjusted Gross Revenue (AGR) as spectrum usage charges and license fees. The direct impact on Singtel earnings is a negative S$1.4bn. While the court ruling is unfavourable for Airtel, it will be worse for competitor VI whose debt profile is weaker than Airtel (Net Debt/EBITDA 4X vs 8X). This fine will severely impair VI’s ability to invest in its network, we think there will more rational capex spending in the industry.

– Enterprise suffering multiple headwinds. Group enterprise revenue weakened 5% YoY due to poor business sentiment and weakness in the Australian financial sector. Revenue for Optus ICT segment dropped 25% YoY to A$121mn, while the carriage business fell 18% to A$169mn. The Australian market is faced with pricing pressure especially from the financial sector as the sector is allocating more expenditure into compliance. The shift to cloud services also hurt the legacy hardware business. We expect growth in cloud services to eventually offset the decline in the legacy business.

– Digital business hurt by cautious advertisement spends. Amobee’s revenue declined 9% YoY to S$293mn due to spending cuts by major customers. There were declines in the legacy businesses of managed media, social businesses and tech fee compression. The programmatic business grew which helped to offset the weakness in the legacy business. EBITDA improved on better cost management. Amobee’s revenue is expected to decline mid-single-digit in FY20e.

Outlook

Management guided revenue lower to stable from mid-single-digit growth and EBITDA guided lower to stable from high-single-digit growth. We expect continued weakness in group enterprise in the near-term. We have modelled in a modest recovery in 2H21e as we expect the Australian financial sector to stabilise and resume their digitalisation efforts. We are anticipating new Mobile Virtual Network Operators (MVNOs) and the entry of TPG Telecom in 2020. This should weigh down the Singapore consumer segment. Singtel is implementing 5G trials with the Port of Singapore Authority to explore the use of driverless vehicles to move shipping containers. CAPEX was however guided S$100mn lower to S$2.1bn. We believe this is done to provide short term relieve in FCF. During a technology upgrade cycle, Singtel expects CAPEX as a percentage of revenue to hover around mid-teens. 2H20 CAPEX/revenue is at 10.9%, we can expect a gradual increase in CAPEX going forward into 2020.

Maintained ACCUMULATE with a lower TP of S$3.31 (prev. S$3.45).

We revised FY20e EBITDA and NPAT downwards by 9%/56% due to the results and change in guidance. Our valuation is based on 7X EV/EBITDA of the Singapore and Australia business and the value of Singtel’s listed associates. We like Singtel for its earnings diversity and stable dividend yield of 5.5%.