• 1H21 ex-exceptional results within expectations, 1H21 EBITDA at 45% of our FY21e forecast.
• Two major exceptionals were dilution gain on Airtel of S$550mn and Airtel’s exceptional losses of S$912mn from additional licence fees and spectrum charges.
• Optus’ EBITDA fell 30% YoY to A$977mn due to loss of on-net broadband subscribers and weaker equipment sales.
• Interim dividend cut by 25% to 5.1 cents (1H20: 6.8 cents).
• Only FY21 guidance was dividends from associates will be S$1.3bn (FY20: S$1.3bn). Maintain NEUTRAL and SOTP TP of S$2.44. Operationally, the worst appears over as EBITDA is improving QoQ. The two pain points remain declining roaming revenue as borders shut and loss of high-margin broadband business in Australia to NBN.

The Positive

+ QoQ improvement in EBITDA. Group EBITDA rose 12% QoQ to S$1bn as revenue recovered in all key businesses. Mobile ARPU in Singapore stabilised QoQ at S$23. In Australia, ARPU expanded a modest 3% to A$29. A recovery in enterprise was led by managed services and cybersecurity.

The Negatives

– Cut in dividends.  Singtel cut its interim dividend by 25% to 5.1 cents and has adopted scrip dividends. Uncertainties over the pandemic and a commitment to keep investment-grade ratings were among the reasons given. Full-year dividends will not exceed underlying profits. Our full-year underlying EPS is 13 cents.

– Optus a source of weakness. EBITDA in Australia was down 29% YoY to A$977mn. Revenue fell  9% YoY as mobile equipment sales declined 25% YoY and on-net broadband, 53% YoY. Despite lower revenue, fixed costs such as selling, administrative and staff costs rose a combined 7% to A$920mn. Optus remained burdened by running two broadband networks and headcount as it manages the migration of customers from its network to the government’s National Broadband Network (NBN).

Outlook

Likely bottomed. We are encouraged by the gradual recovery in its operations and believe a bottom has formed. For steeper and more sustainable improvements in earnings, roaming revenue would need to return to its mobile business as international travel resumes. Secondly, Optus has to remove the cost of running its on-net broadband business and any other NBN transition expenses.

5G requires more value add. The company reiterated that the cost of delivering data to customers will be lower.  Telcos need to build services and other applications beyond faster 5G speeds and larger data capacity to raise ARPUs, because excess capacity in 5G can be built up by the industry and erode the price premium from improved connectivity.

Maintain NEUTRAL and SOTP TP of S$2.44

Our FY21e EBITDA has been lowered by 1% while FY22e has been raised by 6% as we assume recovery in travel and NBN migration cost tapers down. We continue to value Singtel on sum of the parts, applying 6x EV/EBITDA to its core Singapore and Australia operations, in line with regional peers, and valuing associates at market valuations with a 20% discount to account for variability in share prices.