SingTel: Regional Strength And Optus Dividends

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-Few re-rating catalysts
-Optus: margin vs revenue
 

By Eva Brocklehurst

Singapore Telecommunications ((SGT)) is managing its business well. The regional telco's strength, for brokers, is the modestly robust outlook and, for shareholders, in the dividend pay-out. Overall, earnings are expected to be nondescript in FY14. The debate downunder resides on balancing the Australian business, Optus, between revenue and margin growth.

Macquarie believes SingTel's steady core operations will continue to support dividends and positive developments in India and Indonesia will provide the upside catalysts. SingTel is trading at relatively undemanding multiples and is attractively valued at current levels relative to regional peers, in the broker's view. The bright spot in the second quarter was wireless revenue and subscriber growth in Singapore. Mobile remains the company's key growth driver, providing 7% year on year growth in the quarter.

For CIMB there's few re-rating catalysts but the dividend is attractive. The broker expects the aggressive investments the company has made will weigh down earnings, although there's less of a chance for disappointments with more stable regional currencies. Currency weakness, and withholding tax on dividends from associates, were the main reasons as to why the second quarter profit was disappointing. The company continues to seek digital acquisition opportunities but has not made any moves as yet. SingTel maintains there's no shortage of targets but is making sure the synergies are there first. SingTel also plans to acquire pay TV content to better differentiate its products.

Optus showed a slowdown in revenue, with a decline of 5.3% similar to the prior quarter. CIMB notes that Optus is concentrating less on revenue growth at this point and more on margin, cash flow and investment return. When looked at from this angle the results are impressive, according to the broker. Earnings were up 15.1% and the margin, at 30.4%, was at a level not seen since FY05. Optus is seen performing well in the lower growth operating environment. CIMB does not expect Optus will be able to grow its mobile base much until the 700Mhz spectrum becomes available in 2015. JP Morgan suspects that mobile churn is unlikely to fall any further, given one of the company's competitors, Vodafone ((HTA)), is already so weak.

Vodafone's recovery, when it does eventuate, is expected to impact Optus more so than the bigger player, Telstra ((TLS)). JP Morgan believes that, if churn does increase and the add-on offers remain low, then Optus revenue may decline even faster. If add-ons increase, then margins will fall. It's a matter of where the company decides to place the emphasis. Macquarie does wonder how long Optus would be comfortable with trading away some scale in return for profit growth. The broker suspects it won't be long before the company is looking to turn around the subscriber declines. Most likely Optus will start with limited-time promotional offers to shore up its base. This can be done while maintaining profit growth, in Macquarie's opinion.

JP Morgan thinks asset sales and a special dividend are both unlikely and there's no catalysts for earnings upgrades. The net profit in the second quarter missed the broker's estimates by 9%. The stock is expected to be range bound and earnings forecasts for FY14-16 have been cut by 6-7%. Usher in the downgrade. The three brokers that recently updated views on the FNArena database are JP Morgan, which has downgraded the stock to Neutral from Overweight, Macquarie which retains the lone Outperform rating and CIMB, also Neutral. Hence, one Buy and two Hold. The dividend yield on consensus forecasts is 4.4% for FY14 and 4.8% for FY15.
 

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