May 19, 2017

Singtel is now up against the unmistakable fourth entrant (TPG) across both the Singapore and Australian markets. We believe this could cap share price upside as investors take stock of greater earnings risks beyond its home turf. Downside risk is nonetheless limited by its fairly attractive and sustainable dividend yield of 5%.

While Singtel added the highest number of postpaid subscribers (subs) in the industry at 42,000 in 1Q17, postpaid APRU slipped 4.3% YoY to SGD67 as the strong growth was not sufficient to offset pressures on roaming and usage revenue. Higher takeup of SIM-only plans also contributed to a further dilution in ARPU, causing mobile service revenue fell 2% YoY.

Optus continues to see strong subscriber growth, adding 147,000 subs during the quarter – a five year high. We expect the strong momentum to continue on the back of the improvement in 4G network coverage (96.1% population coverage). Management expects to close the coverage gap with Telstra (98% population coverage) by 2018, which alongside the strong content bundling would put it in a solid position to fend off competition from TPG Telecom (TPG), which would likely compete on price.

We cut our FY18/19 core earnings forecasts by 8-13%, mainly to factor in higher acquisition and retention activities at Optus, with the entry of TPG and higher capex as per management’s guidance.

Maintain Neutral, SOP TP is lowered to SGD3.90 after rolling over our forecast base year to FY18, and reflecting the latest marked-to-market valuations of its key associates. Singtel remains our preferred exposure to the Singapore telcos sector. –RHB

Singtel closed at: S$3.730