Singapore Telecommunications (ST SP) (Maintained)

Regional Morning Notes Thursday, 13 June 2019

COMPANY UPDATE BUY Singapore Telecommunications (ST SP) (Maintained)

Focus On Defending Core Business And Staying Lean Share Price S$3.32 Singtel aims to defend its market leadership position in consumer telco services, growth Target Price S$3.58 in digital businesses and keep a lid on cost. FY20 guidance includes mid single-digit Upside +8.0% revenue growth and EBITDA stable at S$4.5b. Competition overhang from TPG appears muted but sliding voice usage and data competition remain as key challenges in both Singapore and Australia. Maintain BUY on share price weakness with a target price of COMPANY DESCRIPTION S$3.58. Valuations have reverted to the mean for the stock, dividend yield is 5%. Telecommunications WHAT’S NEW  FY20 outlook: Cautiously optimistic. In a recent Singapore Telecom (Singtel) Investor STOCK DATA Day, management re-iterated its commitment to: a) defend its market leadership position in consumer telco services in both Australia and Singapore, b) drive digital businesses, and c) GICS sector Communication Services keep a tight lid on cost structure - digitisation of traditional operating model to be able to Bloomberg ticker: ST SP pass on the cost savings to consumers. All in all, Singtel guides for mid single-digit revenue Shares issued (m): 16,329.2 growth in FY20 and EBITDA of ~S$4.5b. Market cap (S$m): 53,722.9 Market cap (US$m): 39,366.1  Group consumer: Focus on customer experience. Amid lower voice usage and data competition in Singapore, Singtel aims to focus on good customer experience and superior 3-mth avg daily t'over (US$m): 38.8 content offerings. A lean cost structure via continuous digitisation (transforming with new Price Performance (%) operating model) effort is expected to yield stable EBITDA margin for the traditional telco 52-week high/low S$3.33/S$2.86 businesses. Management believes the launch of GOMO – an all-digital, no-contract SIM- 1mth 3mth 6mth 1yr YTD only product, will allow Singtel to capture the millenial segment and anecdotal evidence 3.8 12.3 7.9 1.5 12.3 suggests that cannibalisation on existing subscriber base is minimal. Threat of TPG appears Major Shareholders % muted at this stage. Temasek Hldgs 52.4  Customer first in Australia. We expect Optus to ride on its encouraging postpaid trend Franklin Resources 2.1 (+454,000 net adds) and record EBITDA ($2.5b) in FY19. For FY20, Optus will focus on: a) Vanguard Group Inc 1.5 driving brand recognition, and b) differentiate with exclusive content like National Geographic and Optus Sports application. 5G fixed wireless access provides long-term FY20 NAV/Share (S$) 1.88 opportunity as Optus plans to roll out 1,200 sites by Mar 20. FY20 Net Debt/Share (S$) 0.64  Group enterprise: Re-pricing of government contracts up to 3QFY20. In managed PRICE CHART services (which accounts for 37% of group enterprise S$3b revenue), management expects SINGAPORE TELECOMMUNICATIONS (lcy) (%) SINGAPORE TELECOMMUNICATIONS/FSSTI INDEX revenue compression due to re-pricing of large government contracts progressively from 3.80 120 FY19-20. Managed service revenue is expcted to stablise by 3QFY20. Guidance for group 3.60 enterprise business: ICT to grow low single digit with cyber security growing at low teens. 110 3.40 Business environment remains cautious amid trade tensions between China and the US. 3.20 100

KEY FINANCIALS 3.00 90 Year to 31 Mar (S$m) 2018 2019 2020F 2021F 2022F 2.80

Net turnover 17,532 17,372 16,695 16,791 17,155 2.60 80 80 EBITDA 4,830 4,467 4,545 4,619 4,755 60 Volume (m) Operating profit 2,490 2,245 2,273 2,347 2,483 40 20 Net profit (rep./act.) 5,451 3,094 2,982 3,398 3,621 0 Net profit (adj.) 3,543 2,824 2,982 3,398 3,621 Jun 18 Aug 18 Oct 18 Dec 18 Feb 19 Apr 19 Jun 19 EPS (S$ cent) 22.2 17.7 18.7 21.3 22.7 Source: Bloomberg PE (x) 14.8 18.6 17.6 15.4 14.5 P/B (x) 1.8 1.8 1.7 1.7 1.6 ANALYST(S) EV/EBITDA (x) 13.2 14.3 14.0 13.8 13.4 Dividend yield (%) 6.2 5.3 5.3 4.7 5.1 Chong Lee Len Net margin (%) 31.1 17.8 17.9 20.2 21.1 +603-2147 1992 Net debt/(cash) to equity (%) 33.4 33.9 33.9 34.9 36.2 [email protected]

Interest cover (x) 12.9 12.6 11.7 11.2 10.9 ROE (%) 18.8 10.4 10.0 11.1 11.5 Consensus net profit - - 3,099 3,378 3,699 UOBKH/Consensus (x) - - 0.96 1.01 0.98 Source: SingTel, Bloomberg, UOB Kay Hian

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Regional Morning Notes Thursday, 13 June 2019

 Group digital life: The growth engine. 25% of revenue comes from new businesses MANAGEMENT GUIDANCE (including cyber security) for Singtel, and participating in the digital economy is a non- negotiable strategy. Amobee and DataSpark are EBITDA positive but HOOQ will continue to drag earnings in FY20. Management aims to grow Amobee by high single digit in terms of revenue and EBITDA by a substantial amount. In addition, there are plans to monetise Amobee in the next three years via an IPO or private investors.

 Implications of a Huawei ban. Most of Singtel’s operating companies (opcos) appear ready to switch to out of Huawei in the event the trade war escalates further between China and the US. Most Singtel opcos already have in place multi-vendor stategy and should be able to renegotiate for better cost strcuture in the event of an outright Huawei ban. Huawei is commonlly acknowledged to provide better quality, higher specficiation and importantly, is at least 6 months ahead of its peers in terms of technological offerings. 1Based on average exchange rates during FY2019. 2 Excludes acquisitions. STOCK IMPACT 3 Excludes NBN migration revenue in Australia for FY2019 and FY2020. 4 Includes intragroup revenue.  Maintain cash flow at 17.5 S cents for FY20. Barring unforeseen circumstances, Source: Singtel management intends to maintain ordinary dividends at 17.5 S cents for FY20, and thereafter FOREIGN EXCHANGE MOVEMENTS revert back to paying 60-75% of underlying net profit. This translates to a net dividend yield of 5.3% for FY20. KEY TAKEAWAYS POST SINGTEL INVESTOR DAY 2019 Segment Key Highlights Singtel - Market should focus on customer experience as prices appear to be low enough with SIM-only (Singapore) plans - GOMO is a response to brand differentiation as millennials do not identify with Singtel. Cannibalisation appears minimal. - Competition from TPG appears muted at this stage. - 5G. Still very early days. Regulator and consultant stage. Not looking at auction. It is a beauty contest. So paying for the spectrum will not be expensive. Optus - Next 12 months, focus remains on gaining profitable market share. Source: Singtel (Australia) 1) Improve customer experience and NBN experience, 2) Improve and extend network –in 4G capacity and 5G 1,200 base stations rollout, PBT BY BUSINESS UNIT (FY19) 3) Improve exclusive content offering – Optus Sport gaining traction. 15-20% of customers surveyed said they moved to Optus because of Optus Sport, and 4) Focus on cost discipline. Globe Intouch Others Telkomsel - Looking at price repair post FY19, a more stable market vs 3 years ago. Risk is sliding legacy 8% 2% 2% Singapore (Indonesia) voice – 40% of revenue and therefore, more to lose vis-à-vis competitor. Bharti 24% -11% - No huge price reduction but a reduction in aggressive customer acquisition by telcos. - Continued network investment – to stay competitive. AIS AIS - Guidance: revenue to grow mid-single digit and EBITDA margin stable at 43%. 7% (Thailand) - Pre-to-post paid conversion remains key trend for FY20 but need to monitor quality of conversion. - 700MHz spectrum: pricing appears fair and results will be known by end-Jun 19. Currently Optus reviewing the allocation. More applicable for 5G coverage. Telkomsel 22% Bharti Airtel - Expects market to continue experimenting with price points in the prepaid market. Bharti 24% (India) currently has 15-20% of prepaid market. - Will defend its postpaid market share and remain a premium player vis-à-vis Jio. Source: Singtel - Long term: Expect market to move prices up because of respective player’s investment hurdles. As such, ARPU is expected to trend up in a rational 3-player market. Globe - Competition is rational and market has stabilised. Good time to monetise data growth. (Philippines) - Rolling out 5G fixed wireless access (home broadband) next week and it will cement Globe’s current leadership position in Phil home broadband market. - With 1.1m home broadband customers, Globe commands 75-80% market share with 50% of broadband are on the prepaid packages – huge opportunity to grow this business. Source: Singtel EARNINGS REVISION/RISK  No change to earnings estimates. VALUATION/RECOMMENDATION  BUY on share price weakness with a target price of S$3.58, based on DCF (required rate of return: 6.25%, growth: 1%).

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Regional Morning Notes Thursday, 13 June 2019

PROFIT & LOSS BALANCE SHEET Year to 31 Mar (S$m) 2019 2020F 2021F 2022F Year to 31 Mar (S$m) 2019 2020F 2021F 2022F Net turnover 17,372 16,695 16,791 17,155 Fixed assets 11,050 11,330 11,610 11,890 EBITDA 4,467 4,545 4,619 4,755 Other LT assets 30,787 31,596 32,907 34,386 Deprec. & amort. 2,222 2,272 2,272 2,272 Cash/ST investment 513 677 637 597 EBIT 2,245 2,273 2,347 2,483 Other current assets 6,566 4,592 4,617 4,714 Total other non-operating income 225 152 152 152 Total assets 48,916 48,195 49,771 51,587 Associate contributions 1,536 2,075 2,605 2,801 ST debt 1,846 1,846 1,846 1,846 Net interest income/(expense) (355) (387) (411) (435) Other current liabilities 6,948 5,733 5,788 5,917 Pre-tax profit 3,921 4,114 4,692 5,001 LT debt 8,784 9,000 9,600 10,300 Tax (850) (1,152) (1,314) (1,400) Other LT liabilities 1,527 1,634 1,666 1,703 Minorities 23 20 20 20 Shareholders' equity 29,838 30,030 30,940 31,909 Net profit 3,094 2,982 3,398 3,621 Minority interest (28) (48) (68) (88) Net profit (adj.) 2,824 2,982 3,398 3,621 Total liabilities & equity 48,915 48,195 49,771 51,587

CASH FLOW KEY METRICS Year to 31 Mar (S$m) 2019 2020F 2021F 2022F Year to 31 Mar (%) 2019 2020F 2021F 2022F Operating 5,368 6,063 5,366 5,280 Profitability Pre-tax profit 3,921 4,114 4,692 5,001 EBITDA margin 25.7 27.2 27.5 27.7 Tax (680) (700) (750) (800) Pre-tax margin 22.6 24.6 27.9 29.2 Deprec. & amort. 2,222 2,272 2,272 2,272 Net margin 17.8 17.9 20.2 21.1 Associates (1,536) (2,075) (2,605) (2,801) ROA 6.4 6.1 6.9 7.1 Working capital changes (126) 731 1 3 ROE 10.4 10.0 11.1 11.5 Other operating cashflows 1,567 1,722 1,756 1,605 Investing (2,329) (2,830) (3,006) (2,830) Growth Capex (growth) (1,755) (2,400) (2,576) (2,400) Turnover (0.9) (3.9) 0.6 2.2 Investments (2) 0 0 0 EBITDA (7.5) 1.8 1.6 3.0 Proceeds from sale of assets 161 0 0 0 Pre-tax profit (42.1) 4.9 14.1 6.6 Others (733) (430) (430) (430) Net profit (43.2) (3.6) 14.0 6.6 Financing (3,056) (3,069) (2,400) (2,491) Net profit (adj.) (20.3) 5.6 14.0 6.6 Dividend payments (2,857) (2,858) (2,549) (2,716) EPS (20.3) 5.6 14.0 6.6 Issue of shares 0 10 10 10 Proceeds from borrowings 0 216 600 700 Leverage Loan repayment 222 0 0 0 Debt to total capital 26.3 26.6 27.0 27.6 Others/interest paid (421) (437) (461) (485) Debt to equity 35.6 36.1 37.0 38.1 Net cash inflow (outflow) (17) 165 (39) (40) Net debt/(cash) to equity 33.9 33.9 34.9 36.2 Beginning cash & cash 525 512 677 637 Interest cover (x) 12.6 11.7 11.2 10.9 equivalent Changes due to forex impact 4 0 0 0 Ending cash & cash equivalent 512 677 637 597

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Regional Morning Notes Thursday, 13 June 2019

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