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Analysts retain 'buy' calls on Singtel despite 'challenging quarter'

Felicia Tan
Felicia Tan • 4 min read
Analysts retain 'buy' calls on Singtel despite 'challenging quarter'
The telco’s earnings were dragged by the weak regional currencies. Photo: Samuel Isaac Chua/The Edge Singapore
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Analysts are still remaining positive on Singapore Telecommunications’ (Singtel) Z74

prospects after the telco reported its results for the 3QFY2023 ended Dec 31, 2022, on Feb 16.

Among the analysts, the ones from UOB Kay Hian and RHB Group Research are slightly more buoyant with their “buy” calls and unchanged target prices. UOB Kay Hian has kept its target price at $3.15 while RHB Group Research has kept its target price at $3.30. Singtel is also RHB’s preferred sector pick.

“Singtel’s 3Q/9MFY2023 results were light against our forecast (consensus miss) on weak regional currencies,” notes the Singapore research team at RHB. “Overall results reflect the foreign exchange (forex) weakness for Australian dollar (AUD) and regional currencies, and extended investments in NCS. This was partially offset by stronger associates and the recovery in roaming revenues.”

That said, several factors, including the lifting of China’s borders, the closure of Optus’ cyber security incident which was contained in the 3QFY2023, the scaling up of NCS as well as the “continued robust” growth from Airtel should fuel a core earnings compound annual growth rate (CAGR) of 14% for the FY2023 to FY2025, the RHB team writes.

To the team, competition, underperforming earnings and continued foreign exchange (forex) woes are downside risks.

UOB Kay Hian’s Chong Lee Len and Llelleythan Tan are still positive on Singtel as they see the telco’s fundamentals remaining intact.

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Singtel’s overall group revenue and underlying patmi for the 9MFY2023 stood within their expectations at 78% and 74% of the analysts’ full year estimates.

Excluding the absence of migration revenue from NBN and contributions from Amobee, Singtel’s underlying operating revenue would have grown +1.9% y-o-y for the 9MFY2023 while its ebitda would have dropped by 2.3% y-o-y, due to post-acquisition costs from NCS, they point out.

“With a decent yield of 5.9% for FY2023, Singtel remains an attractive play against elevated market volatility, underpinned by improving near- to medium-term fundamentals,” the analysts write.

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To them, a successful monetisation of 5G, data centres and, or NCS, as well as market repair in Singapore and the resumption of regional roaming revenue are all key re-rating catalysts.

Meanwhile, Maybank Securities and PhillipCapital have also kept their “buy” and “accumulate” calls but with lower target prices. Maybank Securities has lowered its target price to $3.10 from $3.15 previously while PhillipCapital’s target price is now at $2.84, down from $3.05.

Maybank Securities’ Kelvin Tan has also cut his core earnings forecast for the FY2023 to FY2025 by 3% to 8% after factoring in slower growth momentum at Optus, near-term challenges at NCS and regional currency headwinds.

Calling the 3QFY2023 a “challenging quarter”, Singtel’s 9MFY2023 patmi missed Tan’s expectations at 74% of his full-year estimates.

In his report, the analyst says he expects operating profits from NCS and Optus to see further challenges as they continue to scale up in digital capabilities, impacting future core ebitda growth. “This prompts us to cut the group’s core ebitda by 8%-9% in our FY2023-FY2025 estimates.”

That said, Singtel remains his sector pick especially during the post-Covid-19 recovery period as he sees China’s reopening continuing to support the rebound in mobile roaming. The uplift in average revenue per user (ARPU) Singtel’s from 5G services while rewarding investors with special dividends on top of regular dividends is also another factor in the telco’s favour, says Tan.

“With China easing its Covid control policy, we expect roaming and prepaid revenue to contribute [around] 6% y-o-y growth on Singtel’s mobile business in FY2024,” Tan writes.

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“We believe that there is still room for further mobile service recovery, led by a doubling of 5G take-up rate and growing tourist arrivals as the number of tourists is still below pre-pandemic levels. This momentum, coupled with the 5G-led ARPU uplift, will contribute [around] 4% of revenue growth, offsetting cost inflation,” he adds. “Further catalysts would be a sharp rise in tariff hikes for Bharti in India, non-core asset divestments and mobile repricing in Australia.”

PhillipCapital’s Paul Chew sees currency headwinds “everywhere” as Singtel’s revenue for the 9MFY2023 stood within his expectations at 73% of his full-year estimates. 9MFY2023 ebitda was below at 67% of his full-year estimates.

In addition to his lower target price, Chew has reduced his FY2023 revenue and ebitda estimates by 5% and 7% respectively as he lowers his AUD assumptions by 10%.

“Earnings growth continues to build up in India and Singapore. Weaker segments are sluggish earnings in Optus and NCS,” Chew writes.

Shares in Singtel closed 1 cent lower or 0.41% down at $2.44 on Feb 20.

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