AUSTRALIA SGT AU Price (at 05:10, 12 Feb 2015 GMT) Outperform A$3.98 Valuation - Sum of Parts A$ 4.64-4.73 12-month target A$ 4.69 12-month TSR % +22.4 Volatility Index Low GICS sector Telecommunication Services Market cap A$m 63,461 30-day avg turnover A$m 4.4 Number shares on issue m 15,945 Investment fundamentals Year end 31 Mar 2014A 2015E 2016E 2017E Revenue m 16,849 17,014 16,749 17,495 Reported profit m 3,653 3,739 4,174 4,726 Adjusted profit m 3,477 3,680 4,174 4,726 Gross cashflow m 5,614 5,937 6,354 6,960 CFPS 35.2 37.2 39.8 43.6 CFPS growth % -1.4 5.6 7.0 9.5 PGCFPS x 11.9 11.3 10.5 9.6 PGCFPS rel x 1.30 1.20 1.22 1.14 EPS adj 21.8 23.0 26.1 29.6 EPS adj growth % -2.4 5.8 13.4 13.2 PER adj x 19.2 18.1 16.0 14.1 PER rel x 1.17 1.10 1.04 0.97 Total DPS 16.8 17.8 18.8 18.8 Total div yield % 4.0 4.3 4.5 4.5 Franking % 0 0 0 0 ROA % 11.1 11.6 12.4 13.9 ROE % 14.5 15.5 17.3 18.4 EV/EBITDA x 14.7 14.6 14.5 13.4 Net debt/equity % 33.7 45.1 36.1 23.2 P/BV x 2.8 2.8 2.7 2.5 SGT AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, February 2015 (all figures in SGD unless noted, TP in AUD) 13 February 2015 Optus rises Event We reiterate our Outperform recommendation on with an increased price target of A$4.69 (prev S$4.05) post 3Q FY15 results. A stronger performance from Optus, building on the last two quarters, has led us to raise our estimates for Optus and increase our target valuations. Additionally, continued delivery in Singapore coupled with good performances out of associates, and in particular Indonesia, were apparent in these results and supportive of our positive thesis on. Meanwhile at 7.3x FY16E EV/EBITDA and offering a 4% dividend yield, valuations are undemanding. Impact Singapore trends continue. In Singapore, the positive mobile trend continued with revenues up 2% QoQ on higher data revenues and the repricing of products in 3Q. A higher proportion of iphone6 sales however led to a 20% QoQ increase in acquisition costs, but we see the downward trend in subsidies to continue in the market. Singtel TV (previously miotv) continued to grow revenues (+4% QoQ) on higher ARPU and subs. In the Enterprise segment, revenues continued their upward trend (+6% YoY) albeit on stable EBITDA as there appeared to be lower margins on new contracts as well as the impact form the iphone6 launch. Optus gaining momentum: Optus delivered another quarter of solid handset subscriber adds, which was accompanied by strong ARPU growth. Combined these drove Mobile service revenues up by 4.3%, which was the 5 th consecutive quarter of improving growth rates, leading management to upgrade Australian revenue growth guidance. Subscriber acquisition costs were well contained in the context of iphone 6 demand, allowing Optus to deliver underlying EBITDA growth in the quarter of 5.5%. We see Optus delivering mid-single-digit EBITDA growth in FY16 and FY17 on the back of momentum currently being gained in the business. Telkomsel a standout. Telkomsel posted an 11% QoQ rise in profit contributions on the back of higher data adoption. Telkomsel recorded a 38% YoY jump in data and digital revenues in 9M FY15. Earnings and target price revision We have tweaked our FY14-17 core profits estimates upwards by 0.9-3.2% on the back of increased estimates for Optus, mitigated partly by adjustments in our forex assumptions. Our sum-of-parts derived price target for Singtel however is increased form A$4.05 to A$4.69 as a result of our upgrades at Optus. Price catalyst 12-month price target: A$4.69 based on a Sum of Parts methodology. Catalyst: Delivery of better results out of Optus and associates. Action and recommendation Outperform reiterated. Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Analysis Fig 1 - Sum of Parts Valuation Methodology Key assumptions^ Stake EV Equity PER PER EPS CAGR EV/EBITDA EBITDA CAGR (%) (S$m) (S$m) S$/sh 15E 16E FY14-17 15E 16E FY14-17 Singapore DCF W=7.0%; LT gr = 1.0% 100% 31,073 31,073 1.95 24.6 21.2 10.1% 13.9 12.6 6.8% Optus DCF W=7.6%; LT gr = 1.5% 100% 24,102 21,340 1.34 20.2 21.7 0.5% 8.3 8.7 0.4% Holding co net debt (7,053) (0.44) Singapore + Optus 55,175 45,360 2.85 19.6 18.5 5.8% 10.8 10.5 3.2% Bharti EV/EBITDA 6.75x FY15 32.4% 10,593 0.66 27.7 21.5 46.0% 7.1 6.4 10.8% Telkomsel DCF W=11.9%; LT gr = 3.0% 35.0% 11,693 0.73 13.7 12.0 13.4% 7.4 6.8 8.8% AIS DCF W=8.0%; LT gr = 1.4% 23.3% 7,260 0.46 20.3 16.9 9.6% 11.8 10.8 8.1% Globe DCF* W=6.8%; LT gr = 1.0% 47.2% 3,171 0.20 17.0 15.8 2.9% 7.7 7.3 4.9% Singapore Post Market 23.0% 844 0.05 Others^ Book 387 0.02 Holding co discount 10.0% (3,395) (0.21) Value of associates 30,553 1.92 Target value of group 75,914 4.76 20.5 18.2 10.0% 8.9 8.2 6.0% ^ W= WACC, LT Gr = long term growth rate; * Cap rate based DCF Source: Bloomberg, Macquarie Research, December 2014 Our DCF derived price target for has increased from A$4.05 to A$4.69 (S$4.40 to S$4.76) largely on the back of our higher target for Optus, which in turn has been driven by revenue and earnings upgrades. Our earnings estimates were adjusted by 0.9-3.2% as the upgrades at the Optus level were mitigated somewhat by forex adjustments. Fig 2 - forecast changes New Old Change 15E 16E 17E 15E 16E 17E 15E 16E 17E Revenue 17,014 16,749 17,495 16,715 16,826 17,699 1.8% -0.5% -1.2% EBITDA 5,190 5,248 5,674 5,172 5,301 5,642 0.4% -1.0% 0.6% Associates 1,743 2,088 2,321 1,684 2,027 2,252 3.5% 3.0% 3.1% Net profit 3,739 4,174 4,726 3,704 4,135 4,581 1.0% 0.9% 3.2% Core net profit 3,711 4,174 4,726 3,677 4,135 4,581 0.9% 0.9% 3.2% Optus Gaining momentum Improving subscriber momentum Optus continued to see improving momentum in its business in the December quarter, with prepaid activations picking up and another robust quarter of post-paid subscriber adds. This shift in momentum follows the introduction of MyPlan+ offerings to the market for post-paid, and we expect this momentum to hold given Optus s improved competitive position and plan structures. The gains in pre-paid may be more fleeting, given the nature of the customer and the more violent shifts that can occur in the pre-paid competitive environment. While handset subscriber numbers are heading in the right direction, Optus continues to see significant wireless broadband subscriber losses, which we attribute to the cannibalisation of its own standalone wireless broadband base by its data sharing offering. and higher ARPU driving mobile service revenue growth Optus service revenues grew by 4.3% in the quarter, another positive step up, as customer ARPUs grew on the back of higher data usage and the migration to higher value plans in post-paid (ie to $80/month from $60/month). The combination of positive subscriber and ARPU growth bodes well for future periods. 13 February 2015 2
Fig 3 Optus service revenue trends continue to improve Fig 4 Post-paid handset adds showing better momentum % ch vs pcp 7% 5% 4.3% 5.0% 60 50 40 k 56 55 44 3% 1.2% 30 1% 19 20-1% -0.8% 12 9 10 11 10 4-3% -2.1% 0-3.8% -5% -1-4.8% -4-5.1% -10-5 -5.5% Prepaid handset Postpaid handset -7% 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15e 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 Subscriber acquisition costs remain subdued, despite iphone 6 launch Another impressive metric for Optus was its ability to contain its subscriber acquisition costs during two quarters that had substantial iphone 6 volumes. On the back of this, Optus has been able to protect margins through a period of abnormally high acquisition and retention, and we see them positioned for modest margin growth going forward from FY16. Fig 5 Subscriber acquisition costs remain subdued Fig 6 Margins holding up as subscriber trends turn 200 180 $ 178 163 166 32% 31% 30.5% 30.3% 31.6% 31.3% 160 140 120 100 80 112 121 115 115 118 112 106 109 30% 29% 28% 27% 27.0% 29.0% 29.1% 28.5% 60 26% 40 25% 20 0 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 24% Q1 Q2 Q3 Q4 FY14 FY15 Note: 4Q15 is Macquarie estimate Part of this is the reduction in handset subsidy by all players, as illustrated in Figure 7. This shows the bundled cost (plan plus handset) to consumers for a mid-range iphone over time has steadily increased over a few years. While competition did initially pick up around the iphone launch, this was short-lived. 13 February 2015 3
Fig 7 Bundled cost for mid-range iphone and plan ($60-70/m plans) $/mnth 95 90 85 Bundled plan costs rising over the last 2.5 years 80 75 A short burst of 70 competition following the Optus MyPlan+ iphone 6 launch 65 releases Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Telstra Optus Vodafone Foundations have been put in place for an earnings growth phase We see Optus earnings entering a solid earnings growth phase as it continues to monetise growth in data consumption and regain subscriber and in time revenue share in Mobiles. Telstra s result today confirms that the industry is thriving, and while there is always the prospect of the competitive environment shifting, we think Optus now has the foundations for solid growth. Our earnings estimates are shown in Fig 8 below, and point to mid-single-digit EBITDA growth for FY16 and FY17. For a more detailed discussion on our views on Optus, please refer our note Telco Sector Key themes for 2015, 10 February 2015. Fig 8 Optus earnings summary (FY13-F17e) Optus: A$: March y/end FY13 1Q14 2Q14 3Q14 4Q14 FY14 1Q15 2Q15 3Q15 4Q1e5 FY15e FY16e FY17e Mobiles 5711 1343 1343 1403 1296 5385 1323 1393 1534 1379 5629 5909 6177 % ch vs pcp -5.9% -6.1% -6.1% -6.5% -3.9% -5.7% -1.5% 3.7% 9.3% 6.4% 4.5% 5.0% 4.5% Fixed - Bus. & W/sale 2013 490 495 479 493 1957 463 485 468 530 1946 1942 1939 % ch vs pcp -0.7% -2.4% -1.9% -0.2% -6.3% -2.8% -5.5% -2.1% -2.3% 7.5% -0.6% -0.2% -0.1% Fixed - Consumer & SMB 1216 287 280 278 278 1123 276 276 288 294 1134 1142 1152 % ch vs pcp -4.6% -6.9% -7.2% -7.9% -8.6% -7.6% -3.8% -1.4% 3.6% 5.9% 1.0% 0.7% 0.9% Total sales revenue 8940 2120 2118 2160 2067 8465 2062 2154 2290 2203 8709 8993 9268 % ch vs pcp -4.6% -5.4% -5.3% -5.4% -5.1% -5.3% -2.7% 1.7% 6.0% 6.6% 2.9% 3.3% 3.1% Other Income 56 12 15 14 17 58 15 22 19 13 69 71 73 Total Income 8996 2132 2133 2174 2084 8523 2077 2176 2309 2216 8778 9064 9341 % ch vs pcp -4.6% -5.4% -5.2% -5.4% -5.1% -5.3% -2.6% 2.0% 6.2% 6.4% 3.0% 3.3% 3.1% Operating expenses 6615 1560 1488 1546 1427 6021 1480 1524 1657 1528 6190 6321 6422 % ch vs pcp -6.5% -8.7% -12.0% -10.2% -4.6% -9.0% -5.1% 2.4% 7.2% 7.1% 2.8% 2.1% 1.6% EBITDA 2381 572 645 628 657 2502 597 652 652 689 2589 2743 2919 % ch vs pcp 1.0% 4.9% 15.3% 9.0% -6.2% 5.1% 4.4% 1.0% 3.8% 4.9% 3.5% 6.0% 6.4% % EBITDA margin 26.6% 27.0% 30.5% 29.1% 31.8% 29.6% 29.0% 30.3% 28.5% 31.3% 29.7% 30.5% 31.5% Source: Macquarie Research, February 2015 13 February 2015 4
Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a reasonably positive view on. The strongest style exposure is Quality, indicating this stock is likely to have a superior and more stable underlying earnings stream. The weakest style exposure is Growth, indicating this stock has weak historic and/or forecast growth. Growth metrics focus on both top and bottom line items. 31/76 Global Alpha Model Sector Rank % of BUY recommendations 50% (11/22) Number of Price Target downgrades 1 Number of Price Target upgrades 14 Attractive Quant Rank within Country Rank within Sector Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. The rankings are displayed relative to the sector and country. Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. 1.8 1.1 1.0 0.8 0.6 0.6-3.0-2.0-1.0 0.0 1.0 2.0 3.0-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. 1.0 0.2 0.8-0.1 0.2-0.1-3.0-2.0-1.0 0.0 1.0 2.0 3.0-60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Relative Turnover Earnings Certainty Earnings Certainty (NTM) Price to Sales NTM Return on Assets FY1 Turnover (USD) 250 Day 250d Volatility Volatility 250 Day Negatives Positives -25% -25% -13% -16% 15% 24% 21% 31% -40% -20% 0% 20% 40% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and country. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score 0.84 NaN -0.07 0.12 0.17 0.24 0.53 0.00-1.11 0.26-0.46 Percentile relative to sector(/76) Percentile relative to country(/242) 0 50 100 0 50 100 0 0 1 1 For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 13 February 2015 5
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 2014 AU/NZ Asia RSA USA CA EUR Outperform 51.80% 58.06% 45.07% 44.42% 60.54% 46.81% (for US coverage by MCUSA, 5.29% of stocks followed are investment banking clients) Neutral 31.80% 27.37% 30.99% 50.10% 35.37% 33.51% (for US coverage by MCUSA, 3.08% of stocks followed are investment banking clients) Underperform 16.39% 14.57% 23.94% 5.48% 4.08% 19.68% (for US coverage by MCUSA, 0.44% of stocks followed are investment banking clients) SGT AU vs ASX 100, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, February 2015 12-month target price methodology SGT AU: A$4.69 based on a Sum of Parts methodology Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. Date Stock Code (BBG code) Recommendation Target Price 10-Dec-2014 SGT AU Outperform A$4.05 15-Aug-2014 SGT AU Outperform A$3.75 13-May-2014 SGT AU Outperform A$3.55 14-Feb-2014 SGT AU Outperform A$3.85 14-Nov-2013 SGT AU Outperform A$4.04 14-Aug-2013 SGT AU Outperform A$3.95 12-Jul-2013 SGT AU Outperform A$3.75 16-May-2013 SGT AU Outperform A$3.45 08-Feb-2013 SGT AU Outperform A$2.93 07-Dec-2012 SGT AU Outperform A$2.81 14-Nov-2012 SGT AU Outperform A$2.76 06-Jul-2012 SGT AU Outperform A$2.80 11-May-2012 SGT AU Outperform A$2.75 Target price risk disclosures: SGT AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group 13 February 2015 6
Ltd (ABN 94 122 169 279, AFSL No. 318062) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. 13 February 2015 7