• 4Q20 revenue and earnings were below expectations. Australia is the largest drag to earnings. Optus earnings were down 83% YoY. Singapore mobile suffered from weaker roaming revenue but wage credits provided an uplift to margins.
• India was the highlight for associates with a turnaround in profits of almost S$98mn.
• FY20 final dividend was cut by 49% to 5.45 cents. No earnings guidance provided for FY21.
• Maintain NEUTRAL with a lower TP of S$2.44 (prev. S$3.18). Our FY21e PATMI is cut by 16%. Outlook will be weak for Singtel. Reduced international travel will lead to lower high margin roaming revenue. The soft economic background will hurt discretionary spending via lower prepaid usage and top-ups, negatively impacting the associates. Australia faces an added challenge of lower fixed broadband business post-NBN.

The Positive

+ Bharti was the bright light. In 4Q20, Bharti reported an operating profit of S$86mn (4Q19: -S$12mn). The associates contribution from Bharti is still negative due to heavy finance cost (S$173mn) and FV loss (S$27mn).

+ ICT revenue grew 7% in Singapore. NCS revenue grew due to higher data centres contracts and maintenance projects. NCS order-book was up approx. 7% YoY to S$3.2bn in Mar20 (Mar19: S$3bn).

The Negatives

– Singapore mobile ARPU suffers.  Mobile blended ARPU suffered a large drop of 19% YoY (13% QoQ) to record low S$26. A combination of lower roaming and higher SIM plans contributed to the weakness. EBIT managed to grow due to undisclosed wage credit in March (est. S$20mn).

– NBN pain for Optus. Optus net profit plunged 83% YoY in A$39mn. EBIT margins tumbled from 16% to 5%. The switch from their internal fixed broadband network to wholesale NBN network has hurt margins significantly for both consumer and enterprise access business. There is still another 135k Optus customers to be migrated to NBN.

Outlook

The pandemic will place pressure on all segments of Singtel operations:

1. Singapore: Roaming traffic has plunged as international travel is curbed. Another repercussion of the outbreak has been slower collections from customers. Wage credits will provide some support to earnings.
2. Australia: Expect further weakness as Optus carries the cost burden from the present on-net fixed broadband that is being transitioned to NBN. The outbreak further exacerbates the sluggishness through higher doubtful debts, lower equipment sales and reduced roaming revenue.
3. Enterprise: The ICT business is growing modestly as reflected by the rise in NCS order-book. However, the access parts of the business will suffer due to reduced traffic.
4. Associates: Bharti turnaround is expected to continue. The market is healing after a brutal price war. Indonesia and Thailand are facing more intense competition. Besides, the lock-downs and weaker economic backdrop will result in lower usage and top-ups for the dominant mobile prepaid segment.

Maintain NEUTRAL with a lower TP of S$2.44 (prev. S$3.18).

We cut our FY21e earnings by 16%. Our valuation model incorporates a 20% discount to the market valuation of the associates.