SingTel - Held back by weaker regional currencies

■ 2QFY16 core net profit was flat yoy (+8.9% qoq) and largely in line. 1HFY16 core net profit was 50% of our FY16 forecast and 48% of consensus.

■ Singapore EBITDA was steady yoy with growth in consumer offset by decline in enterprise. DL losses narrowed yoy but were wider qoq due to HooQ's start-up cost.

■ Optus's EBITDA rose 8.2% yoy in A$ terms. Postpaid net adds stayed healthy.

■ Associates earnings grew yoy and qoq, largely driven by Telkomsel and Globe.

Maintain Add. SOP-based target price raised by 4.7% to S$4.50 after rollover of the base year to FY17. SingTel offers decent 4.5-5.1% yields in FY16-18F.

Results largely in line
SingTel's 2QFY16 core net profit was largely flat yoy (+8.9% qoq) as higher associates earnings were offset by weaker Optus earnings due to a 12.8% softer A$ vs. S$. The earnings were in line with expectations, with 1HFY16 at 50.2% of our FY16 forecast (consensus: 48.3%). In constant currency terms, core net profit was up 3.8% yoy. A 1HFY16 DPS of 6.8 S cts was declared, a 55% payout.

S'pore: A flat quarter for EBITDA
EBITDA was flat yoy in 2QFY16 as the service margin slid 0.6% pts yoy to 32.9%. Excluding World Cup 2014 losses and net trade forex gains, consumer EBITDA rose 2.9% yoy on lower traffic costs. Enterprise EBITDA fell 5.4% yoy on the cessation of fibre rollout revenue since 3QFY15 (+4.3% yoy excluding this). Digital Life's (DL) negative EBITDA reduced 18.9% yoy to S$51m but rose 8.1% qoq due to HooQ's start-up costs.

Optus's profitability improves in A$ terms
Optus's service revenue grew 2.4% yoy (+1.0% qoq) in 2QFY16 due to growth in the consumer mobile business (+3.3% yoy, +1.0% qoq). Postpaid net adds were healthy at 57k (1QFY16: +37k, 2QFY15: +55k), with ARPU down 1.7% yoy. Prepaid users fell further by 45k (1QFY16: -48k) as Optus focused on improving the quality of new prepaid subs. Prepaid ARPU rose 7.4% yoy. EBITDA advanced 8.2% yoy (+10.1% qoq), with margins up 0.2% pt yoy (+2.6% pts qoq) to 30.5%.

Associate earnings tracking in line with our FY16 forecast
Associate contributions in S$ improved 8.4% yoy on the back of growth at Telkomsel (+20.7%) and Globe (+40.1%), partially offset by declines at Bharti (-42.8%, due to higher finance cost and fair value losses) and AIS (-2.6%). Qoq, associate earnings rose 4.0% mainly due to higher contribution from Telkomsel (+20.3%). In 2QFY16, Rp (-2.0%) and THB (-2.0%) eased, Rs rose (+1.1%) and Php was flat vs. S$ qoq. Overall, 1HFY16 associate earnings were in line at 49% of our FY16 forecast.

Technical Analysis
Daily Chart
Maintain Add with higher SOP-based target price of S$4.50
We have maintained our earnings forecasts but raised our SOP-based target price by 4.7% to S$4.50 after rolling forward the base year to FY17. SingTel trades at FY17F EV/OpFCF of 16.3x and offers decent FY16-18F dividend yields of 4.5-5.1%. The share price has slumped 12.4% from its peak in mid-Apr on the back of general market weakness and now offers 20.8% total returns (including 4.5% dividend yield). Potential catalysts include a rebound in regional currencies and earnings improvements at Optus. (Read Report)

Read Related Reports
1) Singapore Telecommunications - Demonstrating Capacity for Resilience by Maybank Kim Eng Research, published on 13 November 2015

2) SingTel - Dating NetFlix by RHB Research, published on 13 November 2015

3) Singapore Telecom - 2Q FY16: Underlying business momentum strong; results in line by Credit Suisse Asia Pacific Equity Research, published on 12 November 2015

4) Singapore Telecom - Leave it in neutral by Daiwa Capital Markets, published on 12 November 2015

5) Singapore Telecom - Buy: Bearing up under pressure by HSBC Global Research, published on 12 November 2015

6) Singtel - Maintain BUY with lower S$4.17 FV‏ by OCBC Investment Research, published on 12 November 2015

Source : CIMB Research

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