SINGAPORE (Apr 16): UOB Kay Hian is maintaining its “buy” call on Singapore Telecommunications (Singtel) with a target price of $4.35.
Singtel has been the least affected by the entrance of Singapore’s fourth mobile operator, TPG Telecom, as overseas business accounts for about 70% of its bottom line.
However, in Indonesia, 35%-owned Telkomsel’s revenue from legacy voice and SMS have succumbed to cannibalisation by data and competition from XL Axiata and Indosat.
Revenue from voice increased 8.7% y-o-y in 1H17, but declined by 7.2% y-o-y in 2H17.
Revenue from SMS started declining earlier with a contraction of 7.9% y-o-y in 2H16, which then accelerated to 14.1% y-o-y in 1H17 and 21.7% y-o-y in 2H17.
Meanwhile, competition from Axiata and Indosat have caused the group’s data-driven growth to moderate.
And although data traffic continued to increase by 127% y-o-y in 4Q17, bolstered by customers migrating to flash data packages, as well as increasing number of data users and smartphone users, the effective pricing for data has declined 41.5% y-o-y to IDR14/MB in 4Q17 due to competition.
Nonetheless, revenue from data, its main engine of growth, has increased 32.7% y-o-y in 3Q18.
EBITDA margin was seasonally lower at 54.1% in 4Q17 compared to 58.7% for 9M17, but the analyst believes that this should normalise upwards as expenses receded in 1Q18.
Elsewhere in India, the group’s 39.5%-owned Bharti Airtel has been facing price competition from Reliance Jio over the past year.
“We estimate that Reliance Jio is currently pricing at a discount of about 15% relative to its larger peers,” says Koh.
Reliance Jio achieved net profit of INR5.04 billion ($101 million) during the second quarter of commercial operations, from Oct to Dec 2017. It clocked net addition of 21.5 million subscribers to bring its subscriber base to 160.1 million as of Dec 2017.
In addition, the pricing erosion caused by Reliance Jio’s entry has triggered the demise of many small players, which turned out to be a blessing in disguise for Bharti Airtel, as it was able to acquire assets from Telenor India and Tata Teleservices at distressed valuations.
In 1Q18, the group’s share price corrected 5.6%. According to the analyst, this is a part of a global switch from defensive to cyclical stocks due to expectations of robust growth for global GDP prevailing then.
“Given recent concerns on geopolitical tension over trade conflicts, we do not expect a similar repositioning of portfolio to be repeated in the near term,” says Koh.
Nontheless, the analyst’s net profit forecast for FY19 remains unchanged as moderation in earnings contribution from regional mobile associates was offset by strong growth from Optus in Australia.
As at 11.55am, shares in Singtel are trading at $3.36 or 1.7 times FY18 book with a dividend yield of 5.3%.