Once upon a time, stocks of Singapore’s telco were “must-have” in the portfolio of investors given their consistent returns, earnings growth and attractive dividends. But things are very different now.
In the last five years, telco stocks have been lost their lustre due to intense competition in the mobile segments as several mobile virtual network operators (MVNO) have set up shop here. There is high competition in the Pay TV segment. And the Covid-19 pandemic has also further accelerated this downward trend.
It was probably a good idea that M1 delisted while it still could because things are not looking up for the two remaining listed telco stocks Singapore Telecommunications (Singtel) and StarHub.
For shareholders who bought shares in the two telcos five years ago, they would be sitting on a loss today. At its peak in April 2015, Singtel was trading at an all-time high of about $4.46. As of Nov 18, shares in Singtel are trading at $2.35, slowly bouncing back from the recent low of $2 on Nov 2.
Similarly, shareholders who bought StarHub five years ago would have seen their shares down some 65% since then. At its highest, StarHub was trading at $4.71 in May 2013. On Nov 18, it was trading at $1.28, recovering from its recent low of $1.13 on March 19 — a level close to its IPO price of $1.15 back in 2004.
Is the worst over for telcos here? PhillipCapital’s head of research Paul Chew says mobile revenues have stabilised and the average revenue per user (ARPU), or the monthly fees each subscriber pays, have bottomed out. “But the trajectory of the recovery, namely roaming revenue will be dependent on the resumption of international travel,” adds Chew.
For more stories about where the money flows, click here for our Capital section
Dragged down by associates
In its results for the 1HFY2021 ended September which was released on Nov 12, Singtel reported higher earnings in the absence of its provision made for a huge licence fee and spectrum usage charges levied on the entire India mobile industry by its regulator.
Singtel had ended 1HFY2020 in the red with a loss at $127 million because Bharti Airtel, Singtel’s associate in India, was slapped with fees and charges of US$3 billion ($5.5 billion), of which $1.9 billion was Singtel’s share.
Free of these charges, Singtel reported earnings of $466.1 million in 1HFY2021 despite a 10.2% y-o-y drop in revenue to $7.4 billion, mainly due to the consumer segment of its Australian Optus business which was undergoing structural changes.
Business in Singapore was not rosy either as the local consumer business was adversely affected by the “circuit breaker” period, banned cross-border travels. Operating revenue for the segment fell 19% y-o-y, mainly due to lower mobile revenue, which, in turn, was caused by lower roaming and prepaid revenues as well as lower equipment sales.
In FY2020 ended March, Singtel posted its lowest-ever final-year earnings of $1.1 billion, 65% lower compared to FY2019. This was because Singtel booked another $911 million in charges from its Bharti Airtel stake in 2HFY2020. But even without Airtel’s charges, earnings would still have been lower, but by 21% from a year ago.
On the back of declining earnings, Singtel cut its dividends. For FY2020, Singtel declared a final dividend of just 5.45 cents per share, down from 10.7 cents in the previous few fiscal years. This also brings total FY2020 dividend to 12.25 cents per share, versus 17.5 cents per share in FY2019 and 20.5 cents in FY2018.
And since 1HFY2021’s interim dividend was cut by some 28.6% to 5.1 cents from 6.8 cents, Singtel’s total dividend for FY2021 is expected to be lower than that of FY2020. If so, FY2021 would be the third straight year of lower dividends.
Despite Singtel’s bleak performance, analysts are generally positive on the stock with CGS-CIMB Research and RHB Research keeping their “buy” calls on Singtel with the same target price of $3.10 as both research houses cheered Airtel’s improved performance in 1HFY2020, which helped to buffer lower contributions from the other associates.
However, PhillipCapital is less bullish, maintaining its “neutral” recommendation with a $2.40 target price. “We are encouraged by the gradual recovery in its operations and believe a bottom has formed. For steeper and more sustainable improvements in earnings, roaming revenue would need to return to its mobile business as international travel resumes. Secondly, Optus has to remove the cost of running its on-net broadband business and any other NBN (National Broadband Network) transition expenses,” says Chew.
New direction for StarHub
Meanwhile, StarHub will see a new CEO from 2021 after Peter Kaliaropoulos announced his retirement after just two years at the helm. Under Kaliaropoulos’ leadership, StarHub focused on its enterprise business rather than compete in the cut-throat mobile and pay TV segment where margins are diminishing due to price wars.
Kaliaropoulos says the smarter way to stay ahead of the competition is to acquire new businesses as it can accelerate the growth and make up for the declining earnings.
In a previous interview with The Edge Singapore in March, Kaliaropoulos said, “What is smart is a less infrastructure and more service-based competition, with different applications and commercial rates. That’s where the competition can be more beneficial to the customer.”
“We are diversifying into adjacent segments and into new geographies. They’ve got risks but they have got rewards,” he added.
But Covid-19 struck just as StarHub was about to put its new plan into action. And although its enterprise business is showing promising growth, it has yet to be able to pick up the slack from the rest of the segments.
In its latest 3QFY2020 ended September results, the group recorded a 14.5% y-o-y drop in revenue mainly due to lower contributions from mobile, Pay TV and sales of equipment, partially offset by higher revenues from broadband and enterprise business.
With that, profit after tax for 3QFY2020 came in at $44.5 million, 23.3% lower than a year ago.
In its business update, StarHub’s chief corporate officer Veronica Lai says, “We are pleased to see a modest pick-up in our business in Phase Two of Singapore’s reopening, with q-o-q improvements in service revenues for the Pay TV, broadband and cybersecurity businesses, while we continue to forge ahead with our business and cost transformation initiatives. However, our 3QFY2020 performance continued to see the impact from the ongoing global restrictions on travel, particularly for our mobile business.”
PhillipCapital’s Chew prefers StarHub as “all divisions are recovering q-o-q and there is higher dividend yield support”. But he has kept his “neutral” call on the stock as there are yet signs of resumption of international travelling, which is key to StarHub’s earnings recovery.
“Separately, the launch of non-standalone 5G has garnered a better-than-expected response. Customers are transitioning faster to 5G phones. Faster speeds, lower latency and bundled content subscription have encouraged take-up by niche customers such as gamers and other heavy-content users,” says Chew.
DBS Group Research and RHB Group Research also have “neutral” calls on StarHub as the road to recovery is seen to be steady but slow.
On the other hand, UOB Kay Hian and CGSCIMB are most bullish on StarHub as they reiterate their “buy” recommendations with target prices of $1.40 and $1.60, respectively, as the two research houses are confident on the prospects and outlook of StarHub’s enterprise business.
“The stock appears to be well-positioned to defend market share by activating customer acquisition and rolling out new products towards the end of this year,” says UOB KayHian analyst Chong Lee Len.
Broadband monopoly
NetLink NBN Trust is Singapore’s one and only broadband operator. Although not a telco, NetLink Trust works hand-in-hand with the industry as it designs, builds, owns and operates Singapore’s nationwide broadband network.
Compared to Singtel and StarHub, the stock has been on a steady upward trajectory and analysts expect its growth to continue smoothly.
Since its broadband connection is very much localised and not dependent on tourism, NetLink Trust’s unit price has hardly suffered year to date. In fact, it has increased some 3.2% this year to trade at 96 cents on Nov 18.
Furthermore, the trust has been consistently declaring higher DPU for its unitholders. In its latest 1HFY2021 ended September, NetLink Trust declared a DPU of 2.53 cents, 0.4% higher than a year ago. This came on the back of a 1.5% y-o-y increase in earnings to $44.8 million although revenue fell 2.5% to $181.5 million.
Following resilient earnings in 1HFY2021, four in five brokerages are recommending investors to accumulate this stock.
CGS-CIMB, OCBC Investment Research, Maybank Kim Eng and UOB KayHian are all maintaining their “buy” or “add” calls.
“With the increasing usage of fibre broadband services for day-to-day activities driven by growing demand for connectivity and rapid broad-based growth in data consumption, we believe NetLink Trust has a resilient business model, and hence able to weather through various economic cycles given the defensive nature of its income streams,” notes OCBC.
“Furthermore, we expect NetLink Trust to be a key participant of growth in other connected services within the non-residential and NBAP space, especially with Singapore’s push to transform into a digital economy,” it adds.
DBS Group Research on the other hand remains “more conservative” in its valuation. Says analyst Sachin Mittal, “We expect annual capex to hover between $55 million and $60 million in the long term and any potential acquisition or rise in capex could be a positive surprise. Any reduction in regulatory WACC in the next review period could be a negative surprise.”
Covid-19 also impacted NetLink Trust’s operations earlier this year. During the quarter, lower availability of contractors affected diversion revenue due to stoppages of works nationwide, while ducts and manholes revenue saw lower completion of joint projects with requesting licensees and reduction of leasing revenue from NetLink Trust’s ducts. Diversion revenue will continue to be spread over the next six to nine months as some construction works are being pushed back, says Mittal.
