Building growth takes time
- We believe SingTel’s share price will take a breather after a good run over the past 18 months.
- FY16 earnings growth is likely to be flattish given weaker regional currencies and dilution from the recent Trustwave acquisition, which will offset Optus’s stronger performance.
- We cut our FY16-17 core EPS forecasts by 1.7-3.4% but raise our SOP-based target price by 3.5% due to stronger medium-term growth prospects at Optus.
- We downgrade SingTel from Add to Hold as we see flattish earnings performance in FY16 (-0.4%).
- Its FY16 EV/OpFCF of 19.5x also looks fair, supported by decent 4.1-4.6% yields over FY16-18.
- For ASEAN telcos, we now prefer Telkom Indonesia, Indosat and Thaicom.
Weaker regional currencies
- We expect core net profit growth to be flattish (-0.4%) in FY16 (FY15: +3.6%), mainly due to weaker regional currencies vs. S$, before hitting 6.0% in FY17 and 6.2% in FY18.
- Our FY16-18 forex rates for the A$ and Rp are 6.5% and 5.1% lower, respectively, vs. the average in FY15.
- In constant currency, our FY16 core net profit growth forecast is 2.5%. For every 1% rise in the A$ vs. S$, earnings will increase 0.3% and vice versa while for every 1% rise in the Rp, earnings will lift 0.2% and vice versa.
Dilutive new investments
- We are longer-term positive on the S$1.07bn acquisition of Trustwave as it enhances SingTel’s capabilities in the enterprise segment and we see growing demand for cybersecurity services. However, it is a sizeable investment that will be EBITDA-dilutive in FY16 and EPS-dilutive in FY16-18.
- Additionally, SingTel has raised its accrued capex to S$3.0bn in FY16 (FY15: S$2.4bn) to enhance Optus’s mobile network, build a new Singapore data centre and upgrade its billing/customer care system. These should help SingTel remain competitive and drive future growth.
- However, higher funding costs and depreciation will weigh on earnings in the short term.
Still optimistic on Optus
- With stronger net adds over the past three quarters, Optus is starting to gain greater market traction with its My Plan packages and better coverage from its new 4G-700MHz network.
- With its significantly higher capex to upgrade the network, we believe Optus will further narrow the network coverage/quality gap with Telstra and gain market share.
- We expect Optus’s service revenue growth to be better but measured at 1.8% p.a. in FY16-17 (FY15: +1.1%, FY14: -4.1%) as network improvements take time and rivals could react to defend their market share.
Peer Comparison
(FOONG Choong Chen, CFA)
Source: http://research.itradecimb.com/
