SingTel – OSK DMG

Holding Out For a Clearer Line

We keep our NEUTRAL call on SingTel given the unexciting FY15 prospects and lack of strong price catalysts. Optus continues to engineer a difficult revenue recovery while earnings headwinds remain prevalent domestically. The sustained capex spending may mean special dividends taking a backseat. We lower FY15 earnings by 8% and introduce FY16 forecast. SOP-based TP is raised to SGD3.80 (from SGD3.55) after rolling forward to FY16.

Subdued year likely. Aside from the group-wide cost initiatives, which should provide some earnings uplift, we think FY15 could shape up to be another challenging year for SingTel as the recovery in Optus’ revenue is likely to be protracted (Optus constitutes 60% of group revenue). SingTel also faces competitive headwinds at home on broadband and pay-TV. The bright spots are its associates (growing dividends) and stabilising currencies. We do not rule out a special dividend, though this appears less likely with the higher capex planned for FY15.

Group Digital Life (GDL) losses have peaked. SingTel plans to continue seeking opportunities to grow its GDL business. We gather from management that the primary initiatives this year would be on video content distribution and data analytics. When replicated across its associates, the services allow the group to better monetise data. GDL EBITDA losses peaked in FY14, totaling SGD170m, and is expected to narrow by 20% in FY15.

Forecast and risks. We lower our FY15 forecast by 8% after moderating our revenue growth assumptions for its Singapore/Optus businesses and adjusting our forex assumptions. We introduce our core earnings forecast of SGD4.09bn for FY16. Key risks to our forecasts are: i) forex volatility, ii) stronger than expected competition in key markets, and iii) overly aggressive M&As.

SOP-based TP raised to SGD3.80. We roll our valuation to FY16 and update the latest market valuations of its listed overseas associates.

Investment case. SingTel remains a NEUTRAL due to the lack of fundamental re-rating catalysts. Our Top Pick for Singapore telco exposure is M1 (M1, BUY, FV: SGD3.65)

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