Singapore Telecommunications (Singtel) aims to improve its return on invested capital (ROIC) to the high-single digits in the mid-term, up from 5.4% in FY2022. Subsidiary Bharti’s ROIC, for example, could rise to 12%-13%, write CGS-CIMB Research analysts Foong Choon Cheng and Sherman Lam.
In a Sept 1 note, Foong and Lam are maintaining “add” on Singtel with an unchanged target price of $3.20, which represents a 21.7% upside.
Singtel aims to improve its ROIC by capturing growth opportunities in data centres and IT services as enterprises increase spending on digitalisation; leveraging positive price momentum in India, Indonesia and Australia to grow average revenue per user (ARPU); deliver on enterprises’ 5G innovation; and continuing to optimise cost and capex.
Singtel hosted its annual Investor Day on Aug 31 after a two-year hiatus.
According to Foong and Lam, Singtel is comfortable with its current net debt/ebitda at 1.6x in 1QFY2023, while proceeds from its announced asset recycling programme now fully cover incremental 5G capex and growth initiatives. “Hence, we think it will be able to pay FY2023-FY2025 dividends at the top-end of its 60%-80% payout policy.”
Bharti grows
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Bharti believes that another round of price hikes may be able to lift its ARPU by 30-40 rupees (53-70 cents) (1QFY2023: 183 rupees) and ROIC to 12%-13% (1QFY2023: 8%-9%).
Writes Foong and Lam: “While cost inflation is slowing lower-end subs’ upgrade from feature to smartphones, this segment only makes up midteens of its overall revenue mix. Bharti continues to see good revenue growth in the higher end and little downtrading in the mid-end segments.”
For Singapore and Australian telecommunications company Optus, roaming revenue has rebounded nicely to 45%-50% of pre-Covid-19 levels, notes Foong and Lam, despite borders of the big North Asian markets still closed.
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Meanwhile, Singtel Singapore’s 5G subscription rose 2.4 times from September 2021 to March 2022 to 480,000, with 17% in postpaid subscriptions. “On Aug 5, 5G services were offered to Gomo, Singtel’s digital SIM-only brand, and prepaid subs, where we gather take-up has been encouraging and the ARPU uplift is at least $5.”
Expansion mode
Singtel’s NCS and regional data centres are in big expansion mode, says Foong and Lam. “A mid- to longer-term driver, NCS targets to grow its revenue from FY2022’s $2.4 billion to $5 billion by FY2026.”
To achieve this, it plans to expand its staff force from 12,000 to 20,000, though the additions will mainly come from lower cost locations, such as Vietnam and India. Coupled with the impact from its acquisitions, NCS said ebit pressure will likely persist over the next one to two years.
For its regional data centre platform, Singtel aims to build up its capacity fourfold to exceed 220MW across Singapore, Thailand and Indonesia in the next three to five years. It is also looking for suitable partners to expand into other Asean countries, such as Malaysia and Vietnam. It expects healthy ebitda margin of 50%, even outside of Singapore.
Singtel’s current share price implies an FY2023 enterprise value/ebitda (EV/ebitda) of 3.6x for Singtel Singapore and Optus. Foong and Lam note “attractive” dividend yields of 4.3%-6.0% p.a. in FY2023-2025.
As at 11.30am, shares in Singtel are trading 2 cents lower, or 0.76% down, at $2.61.
