Category: SingTel
TELCOs – Maybank Kim Eng
All in; SingTel raised to BUY
- Raise sector weighting to OVERWEIGHT as we upgrade SingTel to BUY. M1 remains our preferred BUY, followed by SingTel.
- M1 will enjoy stronger EPS CAGR of 8.5% over FY14E-16E, while SingTel is on the cusp of an earnings recovery of 5% EPS CAGR after three consecutive years of earnings decline.
- Growth pillars: Data monetisation and falling handset subsidies, with data roaming rebound a bonus.
Upgrade SingTel to BUY, sector to OVERWEIGHT
We upgrade SingTel to BUY with a SOTP-based TP of SGD4.35. We are now BUYers of all the three telcos, prompting us to raise the sector to OVERWEIGHT. In terms of preference, M1 remains our top choice, followed by SingTel which displaces StarHub to the third position. Despite challenges on the Pay TV and home broadband front, StarHub remains a BUY. We believe SingTel’s YTD under-performance and current low market expectations provide room for the stock to be re-rated ahead of StarHub.
Alignment of positive trends
In our view, the building blocks are fast falling in place and were evident in 1Q14 results. Data monetisation accelerated in 1Q14, driving mobile revenue to record levels with growth rate at its fastest in more than four quarters. Tiered data plan users have also hit new highs of more than 50%, and we expect 70% by year-end. Fast-falling handset subsidies are another positive trend that would benefit margins. Lastly, data roaming has finally stabilized after six quarters of YoY decline. The upshot: Stronger earnings growth prospects for the industry.
Catalysts: (1) Data monetisation could take place faster than expected with emphasis on video content to drive data usage. Both SingTel and StarHub are developing more local content for their apps. (2) Data roaming could make a comeback on plans to make it easier to activate or even kick in automatically when users are overseas. (3) Low levels of gearing, especially for M1 and StarHub, and the absence of large capex requirements in the medium term suggest room for higher dividends ahead.
Risks: As the telcos expand the capabilities of their networks to handle newer services such as VoLTE (Voice over LTE) and the greater demand for video content, there could be network outages. Regulatory fines aside, the key risk lies in higher user churn owing to unstable networks. One risk particular to SingTel is an acquisition of Shin Corp as was rumoured a few months ago, which we would view cautiously if it materialises.
TELCOs – Maybank Kim Eng
All in; SingTel raised to BUY
- Raise sector weighting to OVERWEIGHT as we upgrade SingTel to BUY. M1 remains our preferred BUY, followed by SingTel.
- M1 will enjoy stronger EPS CAGR of 8.5% over FY14E-16E, while SingTel is on the cusp of an earnings recovery of 5% EPS CAGR after three consecutive years of earnings decline.
- Growth pillars: Data monetisation and falling handset subsidies, with data roaming rebound a bonus.
Upgrade SingTel to BUY, sector to OVERWEIGHT
We upgrade SingTel to BUY with a SOTP-based TP of SGD4.35. We are now BUYers of all the three telcos, prompting us to raise the sector to OVERWEIGHT. In terms of preference, M1 remains our top choice, followed by SingTel which displaces StarHub to the third position. Despite challenges on the Pay TV and home broadband front, StarHub remains a BUY. We believe SingTel’s YTD under-performance and current low market expectations provide room for the stock to be re-rated ahead of StarHub.
Alignment of positive trends
In our view, the building blocks are fast falling in place and were evident in 1Q14 results. Data monetisation accelerated in 1Q14, driving mobile revenue to record levels with growth rate at its fastest in more than four quarters. Tiered data plan users have also hit new highs of more than 50%, and we expect 70% by year-end. Fast-falling handset subsidies are another positive trend that would benefit margins. Lastly, data roaming has finally stabilized after six quarters of YoY decline. The upshot: Stronger earnings growth prospects for the industry.
Catalysts: (1) Data monetisation could take place faster than expected with emphasis on video content to drive data usage. Both SingTel and StarHub are developing more local content for their apps. (2) Data roaming could make a comeback on plans to make it easier to activate or even kick in automatically when users are overseas. (3) Low levels of gearing, especially for M1 and StarHub, and the absence of large capex requirements in the medium term suggest room for higher dividends ahead.
Risks: As the telcos expand the capabilities of their networks to handle newer services such as VoLTE (Voice over LTE) and the greater demand for video content, there could be network outages. Regulatory fines aside, the key risk lies in higher user churn owing to unstable networks. One risk particular to SingTel is an acquisition of Shin Corp as was rumoured a few months ago, which we would view cautiously if it materialises.
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.
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)
TELCOs – MayBank Kim Eng
Handset subsidies in freefall
- Maintain NEUTRAL on sector with BUY on StarHub and M1 unchanged. M1 preferred for likelihood of special dividend.
- Lower handset subsidies for popular models such as Samsung Galaxy S5 and HTC One M8 should see telco margins benefit.
- Government cut on SIM cards from 10 to three per sub could hurt prepaid mobile revenue.
What’s New
The higher prices of three new major handsets launched last week confirmed our view that handset subsidies would decline this year. For basic plans, the Samsung Galaxy S5, for example, received the lowest level of subsidies yet, ie, SGD369-380, down by 21-22% from SGD469-490 for the S4 (in 2013), and lower still from the S3, when the subsidy was as high as SGD550 (in 2012). Similarly, subsidies for the just-launched HTC One M8 fell by 24-28% to SGD320-360 from SGD420-499 for the original HTC One, launched in 2013.
What’s Our View
We think there could be upside to EBITDA margins from the trend towards lower subsidies. Subsidies had already been reduced last year for the Galaxy S4 and even the most premium of handsets, the iPhone 5S, saw a slight reduction of 1-5%, down to SGD471-483 from SGD475-508.
We estimate that 2013’s subsidy reduction benefited SingTel and StarHub’s EBITDA margins by 2ppts. For both telcos, it was quite clear that margins improved in the quarters the Galaxy S4 and the original HTC One were launched compared to previous models. For M1, the picture was not so clear, perhaps due to its accounting treatment for iPhone subsidies, but we believe its underlying profitability should also have improved.
This year’s subsidy reduction is the highest yet in recent years. We therefore maintain that margin guidance by the telcos, in particular StarHub, is conservative and anticipate further upside.
On a less positive note, the government’s cut in the number of prepaid SIM cards allowed to be purchased from 10 to three per subscriber could have a negative impact on prepaid revenue, as many foreign worker agencies buy up to 10 cards each time for their workers. Prepaid revenue accounts for 13%, 19% and 25% of M1, StarHub and SingTel’s Singapore mobile revenue, respectively.
We maintain BUY on StarHub and M1, with a preference for M1 as we think there could be another special dividend this year. Usually, M1’s special dividends would equal the final dividend.