SingTel - 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.

Technical Analysis
Daily Chart
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. (Read Report)

Source : CIMB Research

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