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Morningstar | Competition not Getting any Easier for SingTel; FVE Increased to SGD 2.80. See Updated Analyst Note from 14 Feb 2019

We increase our fair value estimate for SingTel to SGD 2.80 per share from SGD 2.75 following the release of weak third-quarter results broadly in line with that seen in the second quarter. Time value of money and various currency updates drove the small fair value upgrade despite us nudging down our forecasts again. Fourth-quarter group revenue was flat with EBITDA down by 10.6% and underlying net profit down 28%. The strong Singapore dollar reduced revenue and EBITDA by around three percentage points each with weaker economic conditions and very strong competition in most of its markets also having an impact. The performance in Australia slipped a bit this quarter with Optus revenue up 4.5% but EBITDA down 8.7%, with the Singapore business continuing to decline with EBITDA declining by 6.9% on the back of 6.1% mobile services revenue decline and contributions from Associates, which were down 33% due declines across most of its Associate portfolio and continued losses from Bharti in India. We also retain our narrow moat rating for the company.

Our fair value implies a price/earnings ratio for SingTel of 14.8 times, which is slightly ahead of its average over the past 10 years. On our valuation, the associate businesses are worth slightly more than SingTel’s consolidated Singapore and Australian businesses. The stock remains a dividend play, with the company reiterating its previous guidance that “barring unforeseen circumstances” it expects to maintain its SGD 0.175 ordinary dividend in each of the next two years and thereafter reverting to a payout ratio of between 60% to 75%. This dividend level puts the stock on a dividend yield of 5.6%, but with the current declining earnings, TPG entering the mobile market in Singapore and potentially lumpy 5G mobile capital expenditures at some stage over the next three to four years, dividends in fiscal 2021 and beyond are less certain. Our base case has dividends falling to SGD 0.14 per year from fiscal 2021 to 2023.

Optus, the Australian business, reported revenue up 4.5% for the second quarter and EBITDA down 8.7% in Australian dollar terms, with mobile services revenue declining by 3.3%. Competition in the Australian telecom market seems to have stepped up this year with the incumbent, Telstra, also reporting poor results for its half year ending December 2018 with revenue down 4% and EBITDA down 16%. The long-term future outlook has improved with TPG shelving its plans to build its own mobile network and announcing at the end of August 2018, plans to merge with Vodafone Australia. Prior to this, we were expecting TPG to cause disruption in the market as it tried to fill its network with traffic and customers using lower prices as the attraction. Both Telstra and Optus announced similar levels of postpaid customer net adds but both seemed to pay for it in terms of profitability. Mobile contributes around 60% of Optus’ revenue and we estimate around 80% of the profits. Optus’ performance was impacted by lower receipts for NBN migration from its HFC network but we estimate EBITDA would still have declined without this adjustment. For Optus, we forecast broadly flat EBITDA over the five-year forecast period.

The Singapore domestic business also continues to struggle with revenue increasing by 3% while EBITDA declined by 6.9%. The causes of the margin reduction are reduced high-margin mobile revenue, which was down 6.1%, with growth from its lower-margin business solutions (12%) and managed services (13%). With TPG launching a mobile network in Singapore and M1 likely to be taken private so it can aggressively reinvest in its business, competition is likely to get even tougher going forward. For SingTel’s domestic operations, we also forecast broadly flat EBITDA over the next five years driven by newer digital and cyber security businesses offsetting declines from mobile and some of the legacy voice services.

Digital Life, SingTel’s collection of Internet businesses, reported its first EBITDA breakeven quarter in the fourth quarter last year but has reported losses in each of the first three quarters of this year. Amobee saw revenue increase 14% this quarter and 6% for the first nine months but profitability has slipped to a SGD 2 million loss for the first nine months compared with SGD 31 million profit last year. Management previously admitted that a structural shift was occurring where customers were shifting from media to programmatic purchase of advertising which negatively impacted the result. It claimed that Amobee was well-positioned in this space but gave little details. Digital Life is small in relation to the core telecom businesses and we have little visibility. The division is attempting to use Internet technologies and leverage the Group’s broad subscriber base reach and huge customer information database to add value to small acquired companies in the space. It is focused in three areas: digital marketing; mobile video; and data analytics. Without detailed information on each of the businesses, proper analysis is difficult for external investors and analysts, and we suspect that investors will continue to discount these investments until they show profitability or at least a clear path to profitability.

Pretax contribution from associates was down 33% with only Globe in the Philippines providing positive momentum. Bharti’s contribution from India and South Asia remained in losses in the face of Reliance Jio’s onslaught, while contribution from the largest Associate by profit contribution, Telkomsel in Indonesia, was down by 7% due to the weaker Rupiah. SingTel earned SGD 1.65 billion in dividends from associates in fiscal 2018 which was largely flat year on year. Despite the associate earnings decline this financial year, dividends received in the first nine months are flat on last year but we expect the dividends to eventually follow the earnings down.