Singtel Q3 profit down 14.2% to S$822.8m

SINGTEL'S third-quarter net profit fell 14.2 per cent to S$822.8 million on lower contributions from associates, a decline in NBN migration revenue in Australia and margin erosion in traditional carriage services, the telco announced on Thursday before the market opened.

The results, which were short of analyst estimates, marked the mainboard-listed telco's fifth straight quarter of declining profits. Earnings have been down ever since a bumper quarter fuelled by the NetLink NBN Trust divestment bonanza in 2017.

For the three months ended Dec 31, 2018, earnings per share declined to 5.04 Singapore cents from 5.88 Singapore cents in the preceding year.

Driving the earnings disappointment were losses at key associate Bharti Airtel. Higher voice and data use could not offset the ferocious price competition in South Asia, with Airtel also biting the bullet with higher depreciation and amortisation charges on 4G-upgrade spending.

Singtel recorded a post-tax share of loss to the tune of S$77 million, compared with a post-tax profit of S$37 million the previous year.

But Arthur Lang, head of Singtel's international business, noted that mobile average revenue per user (ARPU) in the South Asian market has still improved by 4 per cent quarter on quarter, after the introduction of minimum recharge plans.

"The situation in India continues to be tough. We are monitoring it closely. But we are cautiously optimistic about it," Mr Lang told a morning briefing.

Post-tax profit contributions also fell year on year at regional associates Telkomsel in Indonesia, as well as AIS in Thailand, where service revenue growth was offset by handset subsidies and advertising.

But group chief executive Chua Sock Koong said in a statement that Singtel's long-term view on its regional associates remains positive.

"We expect the regional markets to revert to more sustainable market structures and deliver long-term profitable growth," she said. "Meanwhile, we are working closely with them to build a regional ecosystem of digital services that leverages the group's strengths and unlocks the value of our joint mobile customer base of over 675 million."

Singtel's operating revenue rose 0.9 per cent for the quarter, to S$4.63 billion, lifted by growth in ICT (information and communications technology), digital services and higher equipment sales.

Yet, despite the lift from the enterprise segment, Singtel's core businesses still saw headline revenue dip on a poorer showing in the consumer space.

Fixed broadband was the only major segment in the Singapore consumer segment to notch turnover growth - up by a modest 0.7 per cent to S$58 million - amid declines in mobile services and home television and landline services.

The management now expects operating revenue from its core consumer and enterprise businesses to grow by a low single digit, while Ebitda (earnings before interest, tax, depreciation and amortisation) is projected to decline by a low single digit. The expected dip in Ebitda is a downgrade from the guidance for stability that was affirmed at Singtel's half-year briefing in November 2018.

Separately, Australia's TPG Telecom dipped its toes into Singapore waters over the year-end festive period with network pilots, joining a fray already crowded by the slew of mobile virtual network operators (MVNOs) that lease network from the operators.

Asked about competition, Singtel consumer chief Yuen Kuan Moon said: "With regard to TPG, they have started some free trials and we've not seen a lot of activity beyond that. They have still not announced any commercial rates yet. So the current impact is really minimal.

"Once they announce the commercial rates, post the free trial period, we will be able to assess how the market is positioning itself vis à vis their prices versus all the MVNOs. Obviously, we are tracking and monitoring their deployment of the network very closely."

He added that Singtel expects more MVNOs to enter the market, "probably in the later part of this year", and is "in active discussions with some of them". Singtel has previously acknowledged two MVNO partners, Zero Mobile and Zero1.

No dividend was recommended for the quarter, as Singtel makes payouts on a half-yearly basis. The board most recently approved an interim one-tier exempt ordinary dividend of 6.8 Singapore cents per share, which was paid in January this year.

RHB Securities Research noted in a report that the stock lacks a catalyst, adding: "We continue to see competitive headwinds in Singapore and Australia pressuring group Ebitda, with management's more conservative guidance capping sentiment."

Meanwhile, Maybank Kim Eng analyst Luis Hilado said: "Assuming no further escalation, value is in fact emerging in the stock. The timing of catalysts, however, remains murky."

Upside factors identified by Mr Hilado included strong growth in Singtel's enterprise and digital life businesses on economies of scale, as well as receding competition in India.

Downside risks, on the other hand, included wireless margin compression sparked by TPG in Singapore or Australia, as well as long-term capital expenditure for 5G technology and a worse-than-expected impact from the switch to data on voice and text messaging.

"The main point of challenge lies with the offshore associates, which are the biggest contributors for group profits," said Citi analyst Arthur Pineda, while adding that "we are starting to see some semblance of stability reverting to key associates such as Telkomsel", where he believes that net profit has bottomed.

Mr Pineda also said that, while the street could trim estimates, a commitment to a 6 per cent dividend yield should curb the longer-term impact on Singtel's share price.

This view was shared by RHB Securities Research, which said that the dividend yield should offer support even as a valuation of one-and-a-half standard deviations below the historical enterprise value-to-Ebitda mean "is reflective of the stock's risk-to-reward profile".

Maybank Kim Eng and RHB Securities Research have maintained a "hold" call on the stock, while Citi's Mr Pineda stuck to a "buy" rating, but cut his target price from S$3.55 to S$3.50.

Sachin Mittal, an analyst at DBS Group Research, kept to the same target price and "buy" call.

"Consensus has been overly bullish on Ebitda from Singapore and Australia," he said, but suggested that shareholders "accumulate Singtel on any weakness - Bharti comes free".

Singtel is trading at a discount "mainly due to Bharti-related issues, which ironically suggest that Bharti's market value is zero", Mr Mittal said, while adding that - based on Bharti Airtel's share price - Singtel's associate stake could be worth as much as S$9.3 billion, with the Indian telecommunications player's earnings possibly set to turn positive in FY2021.

Singtel closed flat at S$3.03 after the results were announced.