Maybank Securities analyst Kelvin Tan is keeping “buy” on Singapore Telecommunications (Singtel) after the recent spate of acquisitions made by its wholly-owned subsidiary, NCS.
He has also kept his target price unchanged at $2.98.
On March 7, NCS acquired The Dialog Group, Australia’s largest privately-owned IT services company, for A$325 million ($325 million).
The acquisition was said to help NCS better support the Australian public sector and enterprise clients.
On March 28, NCS revealed that it had acquired digital services firm ARQ Group (ARQ) in Australia for A$290 million ($297 million).
According to NCS, the move will accelerate its growth in the digital sector in Australia.
See also: Singtel is on track for next level of growth
“Integrating digital, cloud and platform services (NCS NEXT) with existing capabilities should support higher margins,” says Tan in his report dated April 7.
In addition, Tan sees NCS as riding on a multi-year trend, with countries in the Asia-Pacific (APAC) region only realising the need to digitalise recently.
He adds that the digital transformation for enterprises is still in its early stage.
See also: Test debug host entity
According to the International Data Corporation (IDC), 28% of organisations in APAC are in the most progressive stages of digital transformation maturity, the analyst says.
“The three sectors that currently drive NCS’s business are: healthcare & transport; financial, industrial and commercials; and communications, media and technology. This has led to an unprecedented demand surge for digital and technology services, accelerated by Covid-19,” Tan writes.
“While projects can be deployed within three to five years, adapting to change can be slow, extending the runway,” he adds.
With NCS building new capabilities and expanding its business as a pan-Asian B2B digital service provider, Tan is expecting NCS’s EBITDA margin to widen on higher-margin cloud services.
“EBITDA has been on the rise and is currently at 10% of Singtel’s group EBITDA,” he notes. “This is a positive, but we see upside if NCS can demonstrate: comparable growth in bookings as peers; faster-than-expected revenue growth; and sustained margin expansion as NEXT’s services form a bigger proportion of NCS’ revenue.”
On Singtel’s EBITDA as a group, Tan is forecasting group EBITDA to register a 5.9% CAGR over the FY2021 to FY2023 due to the recovery in earnings following the Covid-19 pandemic.
“Pre-tax associate income could contribute to [Singtel's] bottom line by growing 27% over the same period, led by Bharti’s swing to net profit from net loss,” the analyst writes. “We expect net debt to EBITDA, including associate dividends, to remain healthy at 1.6x-2.2x in FY2021-FY2023; providing support to its fixed dividend per share (DPS) commitment.”
For more stories about where money flows, click here for Capital Section
To this end, Tan says he continues to like Singtel’s ability to capitalise on regional leadership via exclusive tie-ups with private, public and associates’ businesses; drive new growth engines and unlock infrastructure asset value to drive growth.
Upside factors identified by the analyst include strong growth in enterprise and Digital Life to positive operating leverage; stronger–than-expected average revenue per user (ARPU) due to easing in price competition in countries it operates in; and faster-than-expected monetisation of 5G development.
Meanwhile, downside factors include the possibility of a failure to monetise the 5G development; a further wireless margin compression triggered by competition in Singapore and, or Australia; and worse-than-expected cannibalisation of wireless voice, SMS and roaming by data.
UOB Kay Hian analysts Chong Lee Len and Chloe Tan are also keeping their "buy" call on Singtel with an unchanged target price of $2.90.
"At our target price, the stock will trade at 13x FY23 EV/EBITDA (its five-year mean EV/EBITDA)," they write in their April 12 report.
According to the analysts in their report, they came away from an NCS meeting "more sanguine" on its near-term prospects.
"We expect NCS to deliver double-digit revenue growth as it focuses on driving digital services within the government and telecommunications sector. Its recent acquisition in Australia paves the way for NCS to enter Asia Pacific’s third-largest ICT market, after Japan and China. It is still too early to monetise NCS as it is on the cusp of ramping up its business," the analysts write.
In their report, Chong and Tan have also kept their earnings estimates unchanged, although they note that NCS's management expects its dividend for the 2HFY2022 to be at the upper range of its 60% to 80% dividend payout policy. The figure will mirror the absolute dividend amount reported in the 1HFY2022, note Chong and Tan.
As such, the analysts have forecasted a dividend of 9.5 cents per share for the FY2022, or a dividend yield of 3.6%.
"Key re-rating catalysts include: [the] successful monetisation of 5G, [a] faster-than-expected recovery in Optus’ consumer and enterprise businesses, and market repair in Singapore and resumption of regional roaming revenue," say the UOB Kay Hian analysts.
Shares in Singtel closed 1 cent lower or 0.38% down at $2.65 on April 8.
