Singapore Telecommunications (Singtel)
Price targets:
Maybank Securities ‘buy’ $3.10
RHB Bank Singapore ‘buy’ $3.40
Phillip Securities ‘accumulate’ $2.84
Maintain ‘buy’ following positive FY2023 earnings
Analysts from Maybank Securities and RHB Bank Singapore are maintaining their “buy” calls for Singapore Telecommunications (Singtel) Z74 , even though the telco missed consensus expectations in FY2023 ended in March, which they attribute to foreign exchange depreciation in the region.
Singtel reported a set of positive results for FY2023, where earnings were up 14% to $2.23 billion from $1.95 billion a year ago, due to the strong performance of its core businesses, underpinned by robust mobile growth and price increases as international travel and roaming recovered, and 5G adoption and demand for information and communications technology (ICT) services rose.
Analyst Kelvin Tan from Maybank says that on a constant-currency basis, patmi would be in line with estimates. Tan has therefore kept his “buy” call with an unchanged target price of $3.10, while rolling forward the telco’s valuations to FY2024.
Similarly, analysts from RHB note that the key deviation from consensus earnings for Singtel was due to a weaker Australian dollar, which fell 6% ytd. However, they note that Singtel has had its highest dividend per share (DPS) payout since FY2019, and have since raised their target price from $3.30 to $3.40, representing a 34% upside and 4% FY2024 yield.
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RHB analysts say that Singtel has a “good operational showing” with a return on invested capital (ROIC) at 8.3%.
Although group revenue and ebitda fell by a marginal 5% and 2.2% ytd, a stronger ebitda margin of 25.2% was achieved, largely on account of tight cost controls.
RHB analysts note that the positive offsets were from associate contributions (+6.1% ytd) on Airtel’s outperformance and lower depreciation expense.
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“A final DPS of 5.3 cents (FY22: 4.8 cents) puts full-year DPS at 14.9 cents (including special DPS of 5 cents), the highest since FY2019 with ordinary DPS of 9.9 cents at the top-end of its 60% to 80% payout, ahead of our and market expectations,” they say.
Likewise, Tan from Maybank Securities says that historical data shows that ROIC has a positive correlation with Singtel’s share price, and as the telco continues to commit to lifting ROIC to a low double-digit within two to three years while improving core profitability and narrowing holding company discount, he believes the share price should react positively.
Tan “continues to be encouraged by Singtel’s focus on reinvigorating its core business while capitalising on growth trends”, noting plans to scale regional data centres, expanding its footprint and digital banking products for GXS bank, and scaling up NCS, the telco’s digital ICT arm, to deliver sustainable dividends (+60% y-o-y) for shareholders.
Meanwhile, RHB analysts note that Singtel’s roaming demand has come back. Singapore consumer revenue grew 5% y-o-y in 2HFY2023, an additional 11.2% ytd, while ebitda gained 15%. Mobile services revenue jumped 12% supported by a further recovery in roaming revenue and higher migrant traffic which bolstered prepaid sales and a stronger 5G adoption.
They also note that Singtel’s asset recycling has resulted in more than $6 billion, and see scope for more cash to be returned as management has set targets for additional $6 billion from further asset divestments.
Paul Chew of Phillip Securities, meanwhile, is not cheered by what he sees happening Down Under. He observes that the bulk of revenue growth generated by Optus, Singtel’s Australia subsidiary, was from low margin equipment sales instead of telecom service. “We believe Optus is struggling to achieve any economies of scale. The A$4.5 billion ($3.98 billion) of capex over the past three years has so far not generated much additional growth in revenue, in our opinion,” writes Chew in his May 29 note. — Nicole Lim
Sembcorp Industries
Price target:
CGS-CIMB Research ‘add’ $5.12
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Deal to supply power to Singtel
CGS-CIMB Research analysts Lim Siew Khee and Izabella Tan have kept their “add” call and $5.12 on Sembcorp Industries U96 following a 10-year power supply deal inked with Singtel.
Under the deal, Singtel will pay $180 million a year starting from October, following the expiry of the current agreement this September.
Citing figures from Sembcorp’s annual reports, the utilities company booked interested-party transaction sales of $174 million for FY2021 and $146 million for FY2019. Sembcorp has a December year-end.
Singtel shareholders will put the new power supply deal to the vote as part of the AGM agenda on July 28.
This multi-year deal with Singtel follows a similar 18-year deal by Sembcorp with Micron.
In its separate announcement on May 25, Singtel says that Sembcorp’s proposal was the most competitive out of four potential suppliers considered.
Singtel also said that it has been offered the option to request Sembcorp to supply solar power, as well as opportunities for Singtel to participate in the latter’s renewable energy projects to support Singtel’s green journey.
According to Lim and Tan’s estimate, with the Singtel and Micron deals in the bag, Sembcorp has secured takers for between 650MW and 700MW of capacity, out of its total of 1.2GW installed here, for the coming one to 18 years.
“As shorter-term contracts roll off, we believe Sembcorp would need to achieve a balance, leaving some capacity to ride on the spot market.
The analysts note that the so-called uniform Singapore energy price (USEP) has been surprisingly strong year-to-date at an average of $339/MWh, up 30% over 2H2022’s average of $259/MWh, spurred by hotter weather and periods of unplanned maintenance of some plants.
If spot prices remain firm, they see an upside to Sembcorp’s current FY2023 earnings estimate of $629 million, which is 4% higher y-o-y. The target price, held steady at $5.12, is pegged to 12x forward FY2024 earnings, and is at a 10% discount to Sembcorp’s regional utilities peers. — The Edge Singapore
Sats
Price targets:
CGS-CIMB Research ‘add’ $3.10
DBS Group Research ‘buy’ $3.40
Citi Investment Research ‘neutral’ $2.98
Post-acquisition challenges amid slowing economic environment
CGS-CIMB analysts have maintained their ‘add’ call and $3.10 target price on Sats, following the ground handler’s 4QFY2023 earnings ended March.
Sats S58 reported a core net profit of $7.2 million, which was short of consensus estimates of $10.1 million but ahead of CGS-CIMB’s $2.5 million forecast. The company chose to refrain from paying dividends for now as it would still be in the red if not for government grants.
While Sats enjoyed higher numbers from the resumption of travel, the company got to bear higher operating costs too. Staff costs, for example, were up 9.1% q-o-q, despite the recognition of $19.7 million in government grants. Raw materials, meanwhile, increased too, up 3.4% q-o-q during the quarter.
Sats, which recently completed the acquisition of Worldwide Flight Services, warns of growing uncertainty in macroeconomic conditions, which could further hurt both consumer and business spending.
Analysts Tay Wee Kuang and Lim Siew Khee believe that Sats will continue to suffer from an overhang, as the company bears near-term integration costs, determination of goodwill and intangible assets, as well as an outsized lease liability which will affect the headline earnings number. “We expect pressure on the share price as the market awaits more clarity,” note the analysts.
DBS Group Research, on the other hand, acknowledges the challenges the cargo business might face because of a slower economy. “Nonetheless, well-positioned to benefit from the rebound of travel activity globally, while its non-aviation food segment should return to growth on the back of capacity/product and channel distribution expansion,” adds DBS, which has a “buy” call and $3.40 target price on the stock.
Citi Investment Research, which has a “neutral” call on the stock, cites uncertainty over debt refinancing stemming from the acquisition of WFS. On the other hand, air traffic is expected to fully normalise in the coming FY2025 ending March 2024. Citi’s target price of $2.98 is pegged at 20 times FY2025 earnings. — The Edge Singapore
