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Morningstar | Competition Ramping Up in Singapore, Australia, and Key Singtel Associates. See Updated Analyst Note from 08 Aug 2018

We retain our fair value estimate for SingTel at SGD 2.85 per share following the release of broadly in-line first-quarter fiscal 2019 results. First-quarter group revenue decreased by 0.5%, EBITDA declined by 2.7%, and underlying net profit declined by 19%. A solid performance in Australia, with Optus EBITDA up 1.6%, was offset by weakness in Singapore, with EBITDA declining by 3.8% and contributions from associates down 25%, owing to increased competition in Indonesia and India. We also retain our narrow moat rating for the company.

Our fair value estimate implies a price/earnings ratio for SingTel of 13.6 times, 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 previously indicating that “barring unforeseen circumstances,” it expects to maintain its SGD 0.175 ordinary dividend in each of the next two years, thereafter reverting to a payout ratio of 60%-75%. This dividend level puts the stock on a dividend yield of 5.6%, but with TPG entering the mobile markets in both Singapore and Australia and potentially lumpy 5G mobile capital expenditure 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 between SGD 0.15 and SGD 0.16 per year from fiscal 2021 to 2023.

Optus, the Australian business, reported revenue up 5.7% for the first quarter and EBITDA up 1.6% in Australian dollar terms, with mobile services revenue growth of 2.1%. Competition in the Australian mobile market seems to have stepped up this year, with all operators, including incumbent Telstra, now offering reasonably priced unlimited data plans. With TPG planning to launch a new mobile network later in 2018, competition could ratchet up even further. While TPG will be building a smaller network than the three incumbent operators, which will be focused more on metro regions, we would expect it to be aggressive on pricing in a similar fashion to Hutchison-owned Three before it merged with Vodafone, and also similar to the strategy of TPG itself in the fixed-line market in Australia. Mobile contributes around 60% of Optus’ revenue and we estimate around 80% of the profits. Optus’ performance in the mobile market improved in the second half of calendar 2017, with Optus growing service revenue at 2.9% and EBITDA at 7.6%, compared with the industry growing service revenue at 0.6% and EBITDA at 1.5% on our estimates, so it is doing relative well in an ordinary looking market. Despite the 4.0% EBITDA growth reported by Optus in fiscal 2018, we forecast broadly flat EBITDA over the next five years as TPG negatively affects market pricing and market share at the margin.

The Singapore domestic business also continues to struggle. Revenue declined by 5.3% while EBITDA declined by 3.8%. There are several issues driving the margin reduction, including reduced high-margin mobile revenue, which was down 3.8%, and data and Internet revenue, which was down 2.5%. Fixed-line customers are also moving to the lower-margin National Broadband Network and away from SingTel’s higher-margin own network. Growth is coming from its lower-margin business solutions, with a jump in revenue growth from pay TV related to the World Cup. With TPG confirmed to be launching a mobile network in Singapore in 2018 without the geographical coverage limitations likely evident in Australia, competition is likely to get even tougher. For SingTel’s domestic operations, we forecast flattish EBITDA over the next five years, driven by these newer digital and cybersecurity businesses offsetting declines from mobile and some of the legacy voice services.

Digital Life, SingTel’s collection of Internet businesses, reported its first EBITDA break-even quarter in the fourth quarter last year but fell back to an EBITDA loss of SGD 23 million in the first quarter. Amobee saw revenue decline 7.1% and moved back to EBITDA break-even this quarter after generating EBITDA of SGD 31 million for the full year last year. Management indicated that HOOQ would still be in investment mode this fiscal year, so we forecast continued losses there. 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.

Post-tax contribution from associates was down 35% excluding exceptional items, with Bharti’s contribution from India and South Asia falling to losses in the face of Reliance Jio’s onslaught, while contribution from the largest associate by profit contribution, Telkomsel in Indonesia, was down by 38%. Positively, Bharti’s results from Africa swung from losses to profits this quarter, and Globe and AIS also reported growth. SingTel earned SGD 1,648 million in dividends from associates in fiscal 2018, which was largely flat year on year. Given the associate earnings decline this financial year, the company is forecasting the receipt of dividends to fall to around SGD 1.4 billion in fiscal 2019.