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Morningstar | No Let up in Competitive Intensity in SingTel’s Key Markets; FVE Retained at SGD 2.80

We retain our fair value estimate for narrow-moat SingTel at SGD 2.80 per share following the release of fourth-quarter results broadly in line with our expectations. Fourth-quarter group revenue was up 1.9% with EBITDA down by 5.2% and underlying net profit down 15%. Excluding the NBN migration revenue, which accelerated this quarter again after a ban on migrations was lifted but is likely to have a short finite life, fourth-quarter revenue would have been broadly flat with EBITDA down by 11%. The performance in Australia was stronger this quarter with Optus revenue up 7.2% and EBITDA up 6.1%, with the Singapore business continuing to decline with EBITDA declining by 10.9% on the back of 4.6% mobile services revenue decline and contributions from associates were down 17% due a large decline from Bharti in India. We retain our narrow moat rating for the company, but would recommend investors wait for a better price to buy.

Our fair value implies a price/earnings ratio for SingTel of 14.7 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. To a certain extent, the stock remains a dividend play, with the company announcing a SGD 0.175 per share ordinary dividend for both this financial year and next year and thereafter reverting to a payout ratio of between 60% and 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 expenditure at some stage over the next two to three years, dividends in fiscal 2021 and beyond are less certain. Our base case has dividends falling to SGD 0.14 per year in fiscal 2021 and 2022 which would put the yield at 4.5%.

Optus, the Australian business, reported revenue up 7.2% for the fourth quarter and EBITDA up 6.1% in Australian dollar terms, with mobile services revenue broadly flat. Competition in the Australian telecom market has stepped up over the past 12-18 months with the incumbent, Telstra, also reporting poor results for its half year ending December 2018, with revenue down 4% and EBITDA down 16%. However, 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. While the Australian Competition and Consumer Commission's, or ACCC’s, decision in May 2019 to oppose the merger may seemingly pave to way for TPG’s separate entry again, we don’t believe they will build, even if they lose the current Federal Court appeal against the ACCC’s decision. Mobile contributes around 60% of Optus’ revenue and we estimate around 80% of the profits. Optus indicated that ICT revenue were negatively impacted by election activity (Victorian state election in November 2018, NSW state election in March 2019, and Federal Election in May 2019) as well as the fallout from the Royal Commission into Financial Services which impacted two of its largest customer groups in the government and the banks. For Optus, we predict EBITDA to grow at around 2% per year over the five-year forecast period.

The Singapore domestic business also continues to struggle with revenue increasing by 4.3% while EBITDA declined by 10.9%. The causes of the margin reduction are reduced high-margin mobile services revenue, which was down 4.6%, with revenue growth from its lower-margin business solutions (7%) and digital businesses (30%). With TPG launching a mobile network in Singapore and M1 taken private so it can aggressively reinvest in its business, competition may well get even tougher going forward, although the incumbent mobile operators have already taken plenty of pain over the past few years through much lower prices. Unfortunately, though, without that M1 listing and associated disclosure, we won’t be able to get complete market statistics. For SingTel’s domestic operations, we also forecast around 2% per year EBITDA growth over the next five years driven by newer digital and cyber security businesses eventually turning profitable 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 quarter this year to report a SGD 91 million EBITDA loss for the fiscal year. Amobee saw revenue increase 27% this quarter and 10% for the year. Amobee’s revenue from traditional media business fell as customers shifted to self-serve programmatic purchase of advertising which negatively impacted the result. 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 sustained profitability.