For STEL, the Australian consumer and Singapore-centric enterprise divisions account for 47% and 27% of revenues, resp. The two factors that will impact midterm growth are Telstra’s competitive response to Optus’ recent aggression and Singapore’s SmartNation initiatives. Optus should grow revenue at 1.9% (FY15-18E) with stable margins as it closes the coverage and quality gap with Telstra. Singapore infocomm spend increased 15% to S$2.2bn in CY14 and is likely to gather momentum in cyber security and traffic management which would play STEL’s strengths. We are also enthused about HooQ, the video streaming product aimed at emerging markets of STEL’s associates.
Optus – taking the bull by the horns
Optus grew mobile service revenue 3% in FY15. STEL is ramping Optus capex to c.21% of sales (FY15 15%) to build on revenue momentum. Coupled with the 700Mhz spectrum, it should help improve network quality and reduce the c.10% ARPU discount to Telstra in the medium-term. Nevertheless, Telstra’s sharp response will constrain Optus mobile and we expect a 100bps EBITDA margin improvement to 33% by FY18E for the Australian consumer business.
Digital Life – strategy gains a firm shape
The government’s SmartNation initiative is moving from proof-of-concept to project implementation stages. STEL JV with the Singapore EDB and purchase of Trustwave (cyber security) puts it in a robust competitive position. We expect EBITDA losses in Digital Life portfolio to peak in FY17, driven by ramp up of HOOQ in the associates markets.
Stub trades at 17.1x FY16E PE, overall dividend yield of 4.3%
We forecast 3-yr revenue and EPS CAGR (FY15-18E) of 2.6% and 7.6%, respectively, aided by robust growth of associates. Our target price is SOTP – DCF for core businesses, and for listed associates’. Key risks include elevated competition in Australia mobile and Singapore markets. See p.18 for details. (Read Report)
Source : Deutsche Bank Markets Research