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Simons Trading Research

Author: simonsg   |   Latest post: Fri, 13 Dec 2019, 4:31 PM

 

SingTel 1Q20F Earnings Preview - Expect Weak 1Q20F, Negatives Are Priced in

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  • SingTel (SGX:Z74) likely to report 1Q20F net underlying earnings of S$630m (-10% q-o-q, -14% y-o-y) vs consensus estimate of S$660m-700m on 8 August.
  • Expect sequential decline in associates’ post-tax profit contributions in 1Q20F due to lower contribution from Telkomsel, Globe and bigger losses from Bharti.
  • Maintain HOLD with a revised Target Price of S$3.40.

Maintain HOLD for 5.3% Yield

  • SingTel (SGX:Z74)’s associate profit contributions have been a critical factor driving Singtel’s share price, via changes in the holding company (Holdco) discount.
  • While Holdco discount had widened to 21% from 17% in July 2019, it may only narrow in late FY20F (Mar YE) or early FY21F after significant recovery in associates’ profit contribution. Bharti’s revenue recovery is unlikely to translate into narrower losses in the near term while Telkomsel is on a slower growth trajectory due to loss of the market share.
  • In terms of PE multiple, SingTel is trading reasonably at 17.4x 12-month forward PE vs. 4-year average of 17.2x.

Where We Differ

  • Our FY20F/21F earnings are 4% each below consensus. This is due to our lower expectations from associates.
  • Consensus is overestimating earnings recovery at Telkomsel and is underestimating losses at Bharti in FY20F.

Weak Associate Profits and a Sequentially Weak Quarter to Lead to a Weak 1Q20F

  • We estimate SingTel to report 1Q20F net underlying earnings of S$630m (-10% q-o-q, -14% y-o-y) on 8 August. Weak performance sequentially would be driven by a ~S$17m q-o-q drop in contribution from Telkomsel due to the loss of market share, ~S$17m drop in contributions from Globe owing to decline in the margin and ~S$11m wider losses from Bharti Airtel.
  • Underlying earnings from Optus are also likely to contract sequentially, owing to a seasonally weak quarter and ~1% q-o-q depreciation of the Australian Dollar, partially offset by ~A$20-25m growth in NBN migration fees.
  • SingTel’s Singapore operations are likely to expand ~28% q-o-q, driven by potential recovery of the Singapore enterprise segment and a sequentially stronger quarter.
  • Associate earnings are likely to contract ~S$41m (-12% q-o-q,-24% y-o-y) driven by a weak Telkomsel and Globe. Decline in associate contributions would be driven by an S$17m sequential drop in contributions from Telkomsel, owing to weak top-line growth and contraction in Telkomsel’s margin. Contributions from Globe are also likely to dip ~S$17m q-o-q over 1Q20F, owing to weakness in Globe’s margin profile and higher depreciation charges over 2Q19 (1Q20 for SingTel).
  • Bharti Airtel also reported wider losses before exceptional gains/losses during the quarter, which should lead to a ~S$11m bigger loss for SingTel in 1Q20F.

a). Profit contribution from Telkomsel likely to come down by 8% q-o-q in 1Q20F

  • Telkomsel reported a lower net profit of Rp6,232bn (-3.7% q-o-q, +17.5% y-o-y,) owing to meagre growth in top line and contraction in Telkomsel’s margin profile due to higher opex during the Lebaran festival season. Telkomsel's top line increased only marginally by 3.4% q-o-q (+9% y-o-y) during the Lebaran quarter which typically sees higher revenues that commensurate with higher costs.
  • Meanwhile, Telkomsel's margins were negatively affected by higher personnel and marketing costs pertaining to the Lebaran festival season, which brought down the company’s EBITDA margin by 2% to 53%. Poor top-line performance despite higher expenses should lead to a ~8% q-o-q contraction of Telkomsel’s quarterly contributions over 1Q20F.

b). Globe reported a 21% q-o-q dip in net income due to higher opex and depreciation. AIS reported a 2.4% q-o-q improvement in net income over 2Q19

  • Globe reported a 21% q-o-q dip in core net earnings driven by a weak margin profile and higher depreciation charges. Revenues expanded 2% q-o-q driven by strong performance in the fixed line segment. Despite growth in revenue, EBITDA dipped 6% q-o-q largely driven by higher staff, marketing and subsidy expenses, dragging EBITDA margins down 400bps to 51%. Depreciation charges also edged up 6% q-o-q with Globe accelerating expansions in the fixed line segment. After factoring in ~1% appreciation of the Philippines Peso against the Singapore Dollar, we expect contributions from Globe to come in at S$65m (-20% q-o-q, stable y-o-y), registering a decline of S$17m.
  • AIS reported a strong quarter, ahead of analyst expectations, registering a 4.4% q-o-q improvement in core service revenue, driven by strong performance in both mobile and fixed broadband segments. EBITDA however, expanded only 1.6% q-o-q, as AIS recognised a one-time legal severance compensation of Bt636m, which drove up the telco’s general and administrative expenses. Net earnings (adjusted for TFRS15) expanded 2.4% q-o-q, which coupled with ~1% appreciation of the Thai Baht against the Singapore Dollar during the quarter, should allow SingTel to report a contribution of S$79m (+3.6% q-o-q, +1% y-o-y), a quarterly increase of ~S$3m from AIS.

c). Bharti Airtel reported a wider loss owing to higher depreciation charges, leading to a higher loss for Singtel

  • Bharti Airtel continued to report signs of improvement in 1Q20, recording a 0.7% q-o-q improvement in its top line, largely driven by steady improvements in mobile operations in India and Africa. Excluding the effect of “Ind-AS116 – Leases”, EBITDA expanded 4.4% q-o-q, driven by Bharti’s “War-on-Waste” cost-cutting initiative. Despite growth in EBITDA, EBIT (excluding the impact of Ind-AS116) dipped 14% q-o-q to INR 10.21bn, owing to higher depreciation and amortisation charges arising from Airtel’s aggressive 4G network expansions. Finance costs (excluding the impact of Ind-AS116) also increased 6% q-o-q, driving down Airtel’s loss after tax before exceptionals to INR14bn (~S$275m). After factoring in ~S$2-3m profit from Airtel Africa and dilution of SingTel’s stake in Bharti Airtel from 39.5% to 35.2% at end-May, we project SingTel would record a S$110m after-tax loss from Bharti Airtel, implying a S$11m wider loss sequentially.

Core Businesses to Improve 7% Q-o-q, Largely Due to a Sequentially Stronger Quarter for Singtel

  • Core businesses are likely to report underlying earnings of S$409m (+7% q-o-q, - 7% y-o-y). Core earnings would be driven by Singapore operations, which should report a sequential recovery driven by a strong quarter over 1Q20F, further buttressed by potential improvements in the Singapore enterprise business.
  • We expect Singapore operations to report underlying earnings of S$207m (+28% q-o-q, -23% y-o-y).
  • Strong performance from Singapore would be partially offset by Optus, which should report a 8% q-o-q drop in underlying earnings over 1Q20F, owing to a sequentially weak quarter and ~1% q-o-q depreciation of the Aussie Dollar. This should be partially offset by ~A$20-25m rise in NBN migration fees (+A$46m growth over 4Q19). We expect Optus to report underlying earnings of S$201m (-8% q-o-q, +21% y-o-y).

Outlook for Singtel

We trim our FY20F earnings by 4%.

  • This is driven by
    1. 0.5% cut to our core-EBITDA as we factor in a 2% y-o-y depreciation of the Aussie Dollar against the Singapore Dollar vs. 1% before, the effect of which was partially offset by upward revisions to our NBN migration fee expectations for Optus over FY20F.
    2. We trim our FY20F associate pre-tax contributions by 12% - This is largely owing to higher-than-expected 1Q20F losses from Bharti Airtel (vs. our expectations for a lower sequential loss driven by lower finance charges) and potentially weaker contributions from Telkomsel, as Telkomsel continues to face aggressive competitive pressures both within and outside Java (vs. our previous expectations for benign competitive conditions in Java to support mid-high growth in contributions from Telkomsel).

Singtel will adopt “SFRS 16 – Leases” in FY20F.

  • The standard requires operating leases to be classified and accounted for in a similar fashion to finance leases with leases recognised as lease liabilities in the statement of financial position, with corresponding “Right-of-Use” assets. In the income statement, operating lease payments will be eliminated and the leases would be accounted for via depreciation charges on the ‘Right-of-Use’ assets and interest expense on the lease liability. In the statement of cash flows, lease payments will be classified as financing cash-flows.
  • While the impact on underlying earnings remains negligible, adoption of SFRS-16 would lead to a bump in the EBITDA, with the elimination of operating leases expenses, which would be accounted for via depreciation and finance charges below the EBITDA level.
  • We await better clarity on changes in SingTel’s core-EBITDA with the adoption of SFRS-16 to incorporate changes with the impact of SFRS-16 in our model.

Source: DBS Research - 6 Aug 2019

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