Singtel on May 27 reported its FY2021 ended March results, which saw earnings fall 49% y-o-y to $544 million, while operating revenue came in at $15.6 billion, 5% lower y-o-y, reflecting NBN migration revenue tapering off for Optus’ fixed business as migrations neared completion, ongoing impact from Covid-19 and continued carriage erosion.
See: Singtel reports 49% lower earnings for FY21, announces new strategic direction
Singtel’s overall drop in earnings came to no surprise as the group had previously announced a $1.2 billion net exceptional losses from its investments in Amobee and Trustwave, as well as from Optus due its legacy fixed access networks.
See: Singtel expects to include net exceptional losses of $839 mil and $1.21 bil for 2H21 and FY21
Along with the results announcement, Singtel also announced a new strategic direction which will push the company to focus on three tenets - realigning its core business towards capturing 5G market share; developing new growth engines in ICT and digital services; and unlocking the value of its infrastructure assets.
Despite the underwhelming results, analysts are remaining positive on the telco as they continue to see value in the stock and this means a clean slate for Singtel in the coming FY2022.
RHB Group Research has maintained its “buy” recommendation with a higher target price of $3.30 from $3.10 previously.
According to the RHB Research Team, a 12-month strategic review could result in partial/full divestment; partnership/collaborations; or restructuring of the businesses, which should position the group on stronger footing to capture growth opportunities.
Singtel continues to suspend the high level guidance across its business pillars due to uncertainties caused by the pandemic and the ongoing strategic review. It has unveiled a new four-pronged strategy: i)reinvigorating the core, ii) capitalising on growth trends, iii) reallocating capital and unlocking value, and iv) championing people and sustainability.
Additionally, management is guiding for a 60-80% dividend payout, about $1.3 billion in associate dividends and about $2.4 billion in capex (including 5G) of which A$1.5 billion is at the Optus level.
Maybank Kim Eng has also kept its “buy” call on Singtel but has lowered its target price to $2.81 from $2.88 previously to account for thinner EBIT margins and revised estimates by the research house’s various analysts covering its associate.
“Nevertheless, we see the new strategic direction – while mostly expected – as a positive with a focus on growth in 5G and ICT,” says analyst Kareen Chan.
On the outlook, Chan sees 5G and NCS to be Singtel’s new growth drivers. On Singtel’s new strategic direction, Chan says, “This is within what we were expecting and we look forward to more detailed plans on execution. Having said that, the strategic reset is a positive development as it provides the new CEO a clean slate to affect changes. As part of this, we think potential partial stake sales could include Bharti and Intouch.”
Nevertheless, Chan does not see Singtel exiting any of its markets given that it is focusing on new growth projects through partnership with other market players.
On the other hand, CGS-CIMB Research continues to rate Singtel “add” with a reduced target price of $2.90 from $3.10 previously.
Lead analyst Foong Choong Chen notes that Singtel’s business in Singapore remains weak but is slightly positive on Optus in Australia as it saw a turnaround h-o-h, while Bharti reported lower losses.
Overall, the new strategic direction offers hope, which could unlock the value of its quality infrastructure assets, which Singtel believes may be worth up to $6 billion.
PhillipCapital on the other hand is less upbeat on Singtel, as it has kept its "neutral" recommendation on the stock with a lower target price of $2.32 from $2.44 previously.
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Analyst Paul Chew says, "Operational outlook is sluggish. Areas with earnings momentum should be Bharti and NCS. Plans to pivot further to 5G connectivity and enterprise applications could power medium-term earnings. But the size of the market and timing of 5G applications such as autonomous vehicles, analytics for the public sector and robotics in manufacturing remain unclear."
Chew notes that Singtel's loss of roaming business in the Singapore consumer segment will likely keep Ebitda sluggish, despite its efforts to ramp up 5G deployment.
In Australia, NBN migration and site preparation revenue is expected to decline further with only 37,000 on-net broadband customers left for full transition to NBN in FY2022. FY21 on-net customers declined by 192,000 while off-net only added 175,000. Optus also booked impairment charges for its legacy on-net fixed access network and staff-related exceptional charges. Chew expects staff costs to be materially lower following this restructuring.
"The push in enterprise will likely be cloud and 5G solutions. Legacy revenue streams such as voice should remain a drag," says Chew, while noting that NCS performed well in FY2021 and will be unveiling details of its growth plan in the coming weeks.
As at 3.20pm, shares in Singtel are trading at $2.41 or 1.5 times FY22 book with a dividend yield of 4.8% according to Maybank Kim Eng’s estimates.
