Analysts are overall pleased with Singapore Telecommunications (Singtel) Z74 , as its 1QFY2024 ended June 30 results were within their expectations.
To recap, Singtel reported on Aug 21 that its underlying net profit was up 15% to $571 million, which was attributed to a lift by lower net finance expense and a higher share of profits from the group’s associates, mainly Airtel, Advanced Info Service (AIS) and InTouch.
With a net exceptional loss compared to a net exceptional gain in the last corresponding quarter however, net profit was down 23% to $483 million, which was mainly from Airtel as it recorded exceptional losses from a steep devaluation of the Nigerian Naira against the US Dollar and a fair value loss from its foreign currency convertible bonds compared to a gain in the last corresponding quarter.
Meanwhile, operating revenue and ebitda were down 2.7% and 7.7% respectively, with a 9% decline in the Australian dollar (AUD).
On a constant currency basis, operating revenue would have been up 2.5%, led by higher revenues from its growth engines, NCS and Digital Infraco, whilst ebitda would have been down 3.1% on inflationary cost pressures. With a reduction in depreciation and amortisation charges, ebit(before associates’ contributions) fell 7.1%.
See more: Singtel reports 23.1% y-o-y drop in net profit of $483 mil for 1QFY2024 due to net exceptional loss
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Following the set of results, DBS Group Research, UOB Kay Hian (UOBKH), Maybank Securities and RHB Bank Singapore have all kept their “buy” calls on Singtel at unchanged target prices, whilst CGS-CIMB Research has maintained their “add” call at a lowered target price.
DBS, UOBKH, Maybank and RHB have kept their unchanged target prices of $3.18, $3.15, $3.10 and $3.40 respectively, whilst CGS-CIMB has lowered their target price to $2.80 from $3.00 previously.
The team of analysts at DBS note that Singtel’s 1QFY2024 underlying net profit of $571 million was in-line and comprising 23.9% of the analyst's FY2024 earnings estimates, crediting the sharp drop of 54% y-o-y in interest expenses to $52 million as a key reason behind the almost 86% growth in earnings, whilst the rest of the growth came from associates’ post-tax earnings growing by 4% y-o-y to $426 million.
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The team also observes that net interest expenses reduced significantly with the proceeds from Singtel’s capital recycling initiatives, whilst interest income was boosted by higher interest rates and increased holdings of fixed deposits and Singapore treasury bills.
Conversely, the core operating profit from Singapore and Australia showed an 8.5% y-o-y drop to $300 million, which was “3% to 4% below” the team’s estimate, which they attribute to the weak performance of Optus Australia, whose operating profit declined 35% y-o-y to $56 million but rose 10% q-o-q.
“Optus achieved a 1% rise in operating revenue in AUD terms due to the sale of insurance business last year offset by rise in roaming and postpaid average revenue per user (ARPU). However, Optus’ operating expenses rose due to high inflation and a spike in energy costs following expiry of a fixed price contract,” writes the team at DBS.
The pre-tax profit from associates of $583 million showed a 1% increase y-o-y was “largely in-line” as growth from Bharti, AIS, Intouch was offset by decline at Telkomsel & Globe.
Overall, the team at DBS likes Singtel for its 6.2% yield and over 10% FY2023 to FY2025 earnings of CAGR-supported by ARPU rise in many markets outside Singapore plus cost-cutting in Singapore & Australia.
The analysts note the ongoing integration of consumer and enterprise business to help cut costs in FY2024 to FY2025 and the regulatory rejection of network sharing by Telstra-TPG Telecom in Australia to support Optus’ where significant recovery in ARPU is taking place as key drivers.
Meanwhile, UOBKH analysts Chong Lee Len and Llelleythan Tan point out that Singtel Singapore posted a respective 1.8% and 0.6% decrease y-o-y in 1QFY2024 revenue and ebitda, citing the drop to “a continued decline in legacy carriage services” and “intense price competition in the lower-end mobile market”, which was slightly offset by an increase of 2.7% y-o-y in mobile service revenue from roaming recovery.
Postpaid ARPU was stable on a q-o-q and y-o-y basis at $32 a month while postpaid subscribers increased by 28,000 q-o-q and 75,000 y-o-y respectively. Dragged by intense price competition, prepaid ARPU was stable q-o-q but dropped by 9.2% y-o-y to $12 a month. Prepaid subscribers grew 15,000 q-o-q and 120,000 y-o-y respectively, on the back of increased foreigner customer base.
Ebitda margins for the first quarter also expanded by 0.5 percentage points (ppt) y-o-y on better cost management.
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On the end of the robust growth shown by NCS, the analysts cheer that growth was driven by a full quarter of contributions from new acquisitions, resulting in a 1QF20Y24 revenue growth of 13.9% y-o-y and ebitda growth of 6.6% y-o-y, and total bookings for 1QFY2024 amounted to $691 million.
“Ebitda margins softened slightly by 0.7 ppt y-o-y and 1.2 ppt q-o-q which we reckon is due to continued opex investments and increased staff costs post-acquisitions,” opine the analysts.
Similarly, Data InfraCo saw an increase in 1QFY2024 revenue and ebitda of 17% y-o-y and 10.7% respectively, which Chong and Tan credit to the healthy data centre businesses benefitting from price uplifts and pass-through of utilities to customers.
The analysts write: “The lower ebitda growth as compared to revenue growth was offset by higher operating costs, with ebitda margins falling slightly by 3.4 ppt y-o-y.”
In the view of Chon and Tan, Singtel “remains an attractive play” against elevated market volatility, underpinned by improving business fundamentals.
Lastly, key re-rating catalysts by the analysts include the successful monetisation of 5G, monetisation of data centres and NCS, as well as market repair in Singapore and the resumption of regional roaming revenue.
Meanwhile, Maybank analyst Kelvin Tan notes that Singtel has announced another $6 billion of capital recycling over the next few years, including proceeds from divestment of Comcentre and disposal of infrastructure assets such as data centres.
“We see more scope for cash to fund investments for growth while keeping leverage in check through asset sales, with minority stakes in regional telecoms worth around $27 billion. It views its regional telecom stakes as strategic, long-term assets as they benefit from leading market positions in developing markets. It could divest a portion of its shares without diminishing its influence, such as last year’s 3.3% Bharti stake sale,” writes Tan.
Upside factors noted by Tan include the strong growth in enterprise and Digital Life to positive operating leverage, a stronger–than-expected ARPU due to easing in price competition in countries it operates in and a faster-than-expected monetisation of 5G development.
Conversely, downside risks include a further wireless margin compression triggered by competition in Singapore and Australia, a worse-than-expected cannibalisation of wireless voice, SMS and roaming by data and lastly a failure to monetise 5G development.
On the other hand, the analyst team at RHB Bank Singapore has brought Singtel's low double-digit return on investment in capital (ROIC) target to attention.
The team says: “After rising to 8.3% in FY2023 (FY2022: 7.3%), management targets low double-digit ROIC in the medium-term. We remain hopeful the target would be achieved soon with the good operational traction from return on equity (ROE) accretive asset recycling initiatives (more than $6 billion since 2021) and the reinvigorated core businesses (Singapore consumers, Optus, and enterprises). There is scope for more value unlocking of infrastructure assets, with digital infrastructure now a strategic pillar. We retain our forecasts for now.”
Key drivers noted by the team include stronger earnings recovery, cost efficiencies, revenue opportunities within the enterprise segment and the unlocking of asset values.
Risks include competition across markets, weaker-than-expected earnings, higher-than-expected capex and currency volatility.
Notably, the team’s listed target price includes a 6% ESG premium led by exemplary group-wide sustainability programmes.
Lastly, CGS-CIMB analyst Kelvin Tan believes Optus’ core business is “seeing improvements”.
Tan writes: “We believe Optus could see further ARPU uplift ahead, on the back of industry price hikes conducted (Optus raised once in May). In addition, management intends to accelerate cost rationalisation efforts and reap synergies from the integration of Optus consumer and enterprise (conducted in Jul last year), which could point to margin improvement opportunities ahead, in our view.”
However, the analyst also understands that a weaker AUD will likely remain an earnings drag.
Tan reasons further asset monetisation and the issuance of special dividends as re-rating catalysts, whilst including the higher price competition impacting ARPUs and forex translation risks for Optus and associates as downside risks.
As at 4:30pm, shares in Singtel are trading at one cent lower or 0.43% down at $2.33 on Aug 22.
