SingTel reported 2Q13 underlying profits of S$886 million, increasing 0.1% y-y. Management revised its guidance on Australia from low single-digit revenue growth, to negative mid-single digit revenue decline, as it focuses on improving customer experience and yield, in the challenging environment. However, EBITDA is expected to remain stable on a Group level, in Singapore, and in Australia. The Group’s 30% equity interest in Ward has also been reclassified as “Asset Held for Sale”. An unchanged interim dividend of 6.8 cents per share was also declared, representing a 62% payout of current 1H13 earnings.
How do we view
2Q13’s earnings were below our expectations on weaker revenue from Optus, mitigated by good cost management. While guidance was lowered, we note the rather resilient performance, while potential earnings surprise may arise from improved data monetization, contributions from Digital Life, and SingTel’s associates.
Investment Actions?
We factor in 2Q13’s earnings, together with management’s downward revision of Optus revenue guidance. We derive a new Sum-of-the-parts (SOTP) target price of S$3.06, and maintain our “Neutral” call.
Singapore
Revenue grew 4.4% y-y, while EBITDA increased 2.1% y-y. While blended ARPU declined y-y from S$52 to S$50, the larger increase in mobile subscribers, both pre-paid and post-paid led to the higher Mobile revenue. Revenue from NSC group also continued to contribute significantly, with a healthy order book, mostly from government-related entities. SingTel’s mio TV also continue to gain market share, while recent non-exclusive wins, especially the renewal of the BPL contract, is expected to reduce churn rates and increase revenue from possibly higher pricing power and subscribers.
We expect a decline in EBITDA margin in 3Q13, due to higher subsidy of iPhone 5 leading to higher acquisition cost. This subsidy would however be recovered over the phone’s contract period.
Optus
Revenue from Optus declined 3.6% y-y, but increased 1.4% q-q to S$2,900 million. The y-y decline was due to price competition, lower service credits, and reduced termination rates mandated from October 2011. This has led to negative mobile industry revenue growth, and a downward revision of revenue guidance, from a low single-digit growth, to a mid single digit decline. EBITDA is expected to remain stable, due to cost reduction initiatives, coupled with Associates Warid was reclassified as “Asset Held for Sale” in 2Q13, thus removing the remaining loss-reporting associate This contributed to the 15.2% y-y increase in share of associates’ pre-tax profit. Excluding the depreciation of the regional currencies, the associates’ pre-tax profit increased by 24% y-y. The stronger y-y performance of AIS and Telkomsel mitigated the weaker performance of Bharti, due to the depreciation of the Indian rupee, and economic headwinds in Africa.
Should Warid be sold, we would expect a large one-off deficit to be recognised in the Income statement, due to the realization of S$ 366 million in cumulative translation loss. The impact would be dependent on the transaction price, with a higher transaction price leading to a higher book value gain on investment, and lower losses on the income statement. However, we are not too optimistic on a high selling price, taking into account Warid’s high debts, operating losses, and guarantee call of US$30.3 million SingTel recently received but has not met. A buyer would likely take this into consideration, therefore further reducing the selling price
Digital Life
While management has not disclosed much on its recent investments, we note that advertising revenue has increased significantly from S$10 million to S$18 million, mainly due to contributions from Amobee. Management guides that they have a clear roadmap, and expect to see increasing contributions from its Digital Life investments.efficiencies.
Moving forward, management sees the key revenue driver to be from the monetizing of data usage. Optus has rebalanced its data allowances, while rolling out 4G and improving its existing 3G network to boost signal coverage. Higher uptake of its bundled plans is also expected to aid in reducing churn rates and increasing revenue.
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