Stable outlook, but Guidance lowered on AUD depreciation

Company Overview

SingTel (ST) is a leading communications service provider with diversified geographical exposures. The core part of SingTel’s business resides in Singapore & Australia, while meaningful stakes in its regional Associates provides the Group with exposure across Asia-Pacific.

• Underlying 1Q14 profits up 5.5% y-y to S$897 million
  
• FY14 Guidance revised downwards on FX weakness.
  
• Maintain “Accumulate” with new TP of S$3.99, based on Dividend yield, Strong business fundamentals, and Growth potential from Associates.
  

What is the news?

SingTel reported 1Q14 underlying profits of S$897 million. Revenue decreased -5.3% y-y, due to lower revenue from Australia. FY14 guidance was revised downward due to expected depreciation of key currencies, including AUD. Excluding this FX impact, management guides business fundamentals remains unchanged and strong. SingTel has changed its presentation to focus on 1) Group Consumer (62% Group’s EBITDA ex-assoc), 2) Group Enterprise (41.5%) and 3) Group Digital Life. (-2.0%)

How do we view

Positively, the improvement in cost management mitigated the decline in revenue, leading to y-y EBITDA margin improvements. For SG Group Consumer, data monetizing continues to gain traction, while residential pay TV showed significant improvements. AU Group Consumer EBITDA increased 4.6% y-y on cost optimizing and similar data monetizing. Management stressed its focus on retaining and maximizing profits from existing customers, instead of growth of customer base. Group Enterprise revenue was lower on weaker business environment, but EBITDA was up 3.1% y-y on cost management.

Investment Actions?

We factor in 1Q14’s earnings. We derive a new Sum-of-the-parts (SOTP) target price of S$3.99. SingTel’s dividend yield remains attractive, while the business remains fundamentally strong, and the associates provide growth potential. We therefore maintain our “Accumulate” rating.

Decent FY14 start; but outlook muted

• 1Q met 24% of FY14 estimate
  
• Margin pressures likely
  
• Lower S$3.81 FV
  

Decent start to FY13

SingTel posted 1QFY14 revenue of S$4293.3m, down 5.3% YoY and 4.2% QoQ, meeting about 24% of our full-year forecast; this largely weighed by lower revenue in Australia and the weaker AUD. Reported net profit though climbed 7.0% YoY and 16.4% QoQ to S$1011.0m, boosted by stronger EBITDA margins and higher associate contributions. Core net profit (excluding exceptional items) rose 5.5% YoY (but fell 10.4%) to S$897m, also meeting 24% of FY14 forecast. Meanwhile, free cashflow also climbed 23% YoY to S$893m, mainly due to timing and higher dividend receipts from associates.

Outlook remains somewhat muted

But going forward, the group’s outlook remains somewhat muted, citing the continued weakness in the AUD. SingTel now expects revenue from Group Consumer to decline by high single-digit level, with lower revenues from Optus, and EBITDA to decline by low single-digit level (versus single-digit growth previously). Still, it expects Mobile Communications revenue from Singapore to grow by low single-digit level; Australia’s mobile service revenue to decline by mid single-digit level. Group Enterprise revenue should remain stable; but EBITDA to see low single-digit decline (versus stable previously). Its Group Digital Life revenue should grow at least 50% on an organic basis; but it will continue to see startup losses. Capex will also increase to S$2.5b to support LTE coverage expansion; invest up to S$2b for digital business over the next three years.

Maintain HOLD with S$3.81 FV

In view of the latest guidance, we pare our FY14F revenue forecast by 5% and core earnings by 1.3%. Also accounting for weaker AUD forecast, our SOTP-based fair value slips from S$3.82 to S$3.81. Maintain HOLD. Separately, SingTel now plans to keep its Optus satellite unit, saying it is committed to growing and investing in the business.

No Strong Catalysts Either Way

1QFY14 results within expectations. Underlying net profit fell 10% QoQ to SGD897m but rose 5.5% YoY. There was an exceptional gain of SGD114m from Bharti’s issue of 5% new shares to Qatar Foundation but this is not included in underlying numbers. Generally, it was a strong set of results with group EBITDA profits up 4.3% and EBITDA margin up 2.8% points to 30.2%, driven by the Singapore consumer business (EBITDA +20%) and a 5% rise in Australia EBITDA despite lower revenue.

2QFY14 margins would be lower. The strong margins in 1Q were definitely helped by lower mobile subscriber acquisition costs in both Singapore and Australia given that nobody launched premium handsets except HTC. However, we do not expect it to last in the rest of the year as Apple is expected to release its new iPhone in Sep/Oct and the other players are bound to follow up with new models. BPL-related content costs and A$ weakness will also crimp margins. The new BPL season starts in Aug and SingTel will start to amortise its cost in 2QFY14.

Guidance revised down. A change in reporting format makes it a bit difficult to forecast but SingTel has generally revised its guidance down. Significantly, group revenue is now expected to fall by mid single digits (previously stable) while EBITDA is expected to fall by low single digits (previously grow by low single digits). According to management, this revision is solely due to the A$ weakness, which has fallen by 10% since the beginning of May, and may be revised up again if the currency reverses direction.

Maintain HOLD, no catalysts. In the absence of strong catalysts either way, we remain Neutral on SingTel, with a DCF-derived target price of SGD3.60. Business conditions are fair to stable with the exception of currency volatility, which is a perennial bugbear for SingTel given that more than half of its profits come from foreign markets. We have changed our valuation methodology to DCF to account for this potential volatility.