SingTel – CIMB

Putting the worst behind

Following SingTel’s FY3/14 results conference call, we think that growth will be driven by Singapore and its associates. Associate contribution should improve on stabilising currencies and improving fundamentals. Optus’s EBITDA should decline in FY15 due to its network gap with Telstra while Digital Life should continue to be earnings dilutive. As a result, we lower our FY15-17 EPS by 3-7% but raise our SOP-based target price by 5 Scts to S$4.10 on higher valuation for Globe and Bharti. SingTel remains an Add with continued earnings recovery as a potential catalyst.

What Happened

SingTel hosted a conference call following the release of its FY14 results. The main takeaways are: 1) It has no plans to raise prices for its 4G data service in Singapore for now; 2) Optus indicated it will continue to focus on 4G rollout, and on regional network rollout ahead of the receipt of 700MHz spectrum in Jan 2015; and 3) its new initiatives to drive Digital Life organically will dilute EBITDA in FY15. All this has been factored into its guidance.

What We Think

We expect SingTel Singapore‟s strategy of aggressively acquiring market share to continue. This strategy has yielded revenue growth, but it has come at the expense of short-term EBITDA margin. Having said that, EBITDA margin appears to have bottomed out in 3QFY14. The margin is also aided by lower device subsidies which is an industry phenomenon. We believe that there is further mobile subscriber and ARPU downside at Optus as it continues to narrow its network gap with Telstra. With its network rebuilding exercise and the use of 700MHz spectrum to expand regional coverage, we expect Optus to be on a stronger earnings path from FY16. Hence, we have lowered our FY15-17 EPS by 3-7%, largely to reflect lower revenue and EBITDA expectations for Optus. Despite this, we raise our SOP-based target price by 5 Scts to S$4.10 after factoring in a higher valuation for Bharti and Globe.

What You Should Do

We continue to like SingTel and retain its Add recommendation even after the stock has re-rated 7% since our upgrade in 13 Feb. The currencies of its key associates have stabilised (Figure 1) and the fundamentals of its associates are generally improving. A likely re-rating catalyst is the continued turnaround in its earnings. Key risks are competition in Australia from Telstra and Optus‟s execution of its network rollout.

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