SingTel – CIMB

Dialling up capex and dividends

We believe that SingTel’s capex will remain elevated after FY3/14 as it is raising its spending on LTE and 3G. It is also allocating S$2bn for investments in digital business in the coming three years. Despite the spending, it nudged up its payout policy from 55-70% to 60-75%.

We upgrade our call on SingTel from Underperform to Neutral with a higher SOP-based target price after removing our discount for Optus on easing competition, among others. We view its higher payout policy positively. We also tweak up our forecasts after imputing the FY13 numbers and FY14 guidance. M1 remains our top Singapore telco pick.

What Happened

The main takeaways from SingTel’s FY13 results and conference call are:

FY14 capex will rise 25% to S$2.5bn due to its investment in LTE and 3G in Singapore and Australia.

EBITDA growth in Singapore and Australia will be muted. Moreover, the surge in capex leads to higher D&A and will be a drag on EBIT.

SingTel is setting aside S$2bn over the next three years to support growth of the digital business though the actual sum is subject to the availability and size of investments. This is a large sum, in our view, and dwarfs the $0.5bn invested so far.

Despite the higher capex, SingTel nudged up its dividend payout policy from 55-70% to 60-75%.

What We Think

Earnings from Singapore and Australia will be weighed down by rising opex and D&A resulting from aggressive capex. This will be offset by robust associate contribution. Capex will remain elevated beyond FY14 as we believe Optus is still in the early stages of its LTE rollout. Also, Optus needs to fork out A$649m for spectrum in FY15.

We view with caution Singtel’s large budget for investments in digital as we think these investments carry higher risks. We would prefer if SingTel returned excess cash to shareholders instead of investing them in adjacent industries.

That said, we view its higher payout policy positively as it reflects a more proactive capital management.

What You Should Do

Switch to M1, our top Singapore telco pick. M1 is benefiting from the rapid take-up of tiered data plans for which it charges an additional S$3/mth.

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