Singtel maps out new strategic direction for growth amid accelerated disruption

Singtel’s strategic review comes amid accelerated global growth in digital economies as the Covid-19 pandemic underscores the importance of digitalisation. More than ever, businesses must depend on the mobile digital platform to reach out to potential customers, source and market their products and successfully close the sale.

For many analysts and industry watchers such as The Edge Singapore, the review did not come as much of a surprise and we had previously looked into several restructuring options for the telco.

Singtel’s strategic reset centres around three key tenets: Leveraging its 5G leadership to reinvigorate its core consumer and enterprise businesses; developing new growth engines in ICT and digital services, and unlocking the value of its quality infrastructure assets.

“This strategic reset is the most significant move in recent years to refocus the business and capitalise on technology proliferation and large-scale digitalisation,” says Singtel’s group CEO Yuen Kuan Moon, who was appointed to the top job in January.

“With mass online migration online over the last 18 months, the pandemic has accelerated trends that were already redefining the basis for success for our industry. We intend to use this unique opportunity to make profound changes, restructure and reposition to emerge stronger,” he adds.

Resetting the network

To gain more market share in the 5G space, Singtel will focus on rolling out consumer and enterprise solutions predominantly targeting Singapore and Australia. It will also “get even more digital” by doubling down on the digitalisation of its operations to drive productivity and cost savings.

To tap new growth, NCS, the group’s ICT arm, will be repositioned to become “a B2B digital services champion in the Asia Pacific”. NCS will set up two strategic business units to focus on government and telecoms, while part of Trustwave’s cybersecurity services will be reorganised into NCS. NCS will also seek growth in the enterprise sector, particularly in healthcare and transport, communications, technology and media and financial services in Singapore, Australia and Greater China.

Just two weeks before Singtel released the results of its strategic reset, the group announced that it expected to record exceptional losses of $1.2 billion for FY2021 ended March due to impairment charges from the group’s investments in independent advertising platform Amobee and Trustwave. This was because the ability of both businesses to scale up and keep up with the competition had been hampered by the Covid-19 pandemic as well as the fast-moving digital marketing and cybersecurity industries.

“The board and the management team have taken the steps to really look at our two big businesses Amobee and Trustwave, reflect on the challenges these businesses face and pick up the impairment. And that has really helped reset the business for the future for success. We hope through our strategic review, we will be able to set these two companies in the right direction,” says Yuen.

While Yuen notes that that was the “right time” some six years ago for the group to venture into the digital marketing space and acquire Amobee, the digital marketing space has since changed quite rapidly. With the importance of social media marketing and challenges from Covid-19, Amobee also took a big hit. “We are taking some of the lessons learned early on from this investment and making sure that we stay close to our business,” he adds.

From now on, Singtel will be more prudent in its investments and shift its focus towards investing by acquiring a minority stake instead of a majority stake or the entire business, Yuen says.

“We will look to skill aggressively and rapidly and are open to taking significant minority stakes with complementary digital natives. We believe this approach will allow us to scale faster, and crystallise value,” says Yuen.

“However, it is not so much about the size of the investment but rather the way we approach it. For example, when we invest in a particular service or solution, are we building an ecosystem? Are we doing it all by ourselves? Or are we going in with a digital native partner who can use Singtel’s assets and together we can scale up the business or increase its momentum a lot faster than anyone else? I believe this is the approach that will help us crystallise value,” he adds.

Unlocking Singtel’s full value

Apart from its investments in other telcos and the enterprise business, Singtel owns some other non-telco related businesses. For instance, the local mail carrier Singapore Post (SingPost) is a wholly-owned subsidiary of Singtel.

“To us, SingPost is largely an independent business that runs by itself. We have a stake in SingPost largely because of a legacy in the past,” says Arthur Lang, Singtel’s CFO. However, at this time, there is no intention by Singtel to exit completely from its stakes in many different listed companies — of which SingPost is one of them — as well as strategic assets like its regional telco associates in India, Australia, Indonesia, Thailand and the Phillippines.

In the latest FY2021 ended March, SingPost’s earnings fell 47.7% y-o-y to $47.6 million from $91.1 million a year ago due to Covid-19-related disruptions. This compared with FY2020 when SingPost posted earnings growth, thanks to the e-commerce boom during the pandemic.

On May 31, SingPost also announced that group CEO Paul Coutts would be resigning to “pursue other opportunities.” He will no longer be a director and will “support a handover” until Aug 31 or earlier.

“I think what is most important is that the stakes in all these listed companies today are not reflected in Singtel’s stock price. This is something we need to work out, in terms of what are all the options that we can undertake to realise the value of these stakes in these companies into Singtel’s share price. That is the overriding objective that we need to focus on,” says Lang.

In FY2021, pre-tax earnings contribution from Singtel’s associates, which included SingPost, NetLink NBN Trust and its regional associates, came in at $1.80 billion.

FY2021 earnings were slashed in half to $544 million compared with FY2020, which included recognition of the $1.2 billion in net exceptional losses.

Operating revenue and ebitda fell 5.4% and 16% y-o-y respectively due to a steep decline in NBN (Nationwide Broadband Network) migration revenues and lower roaming and prepaid revenues as Covid-19 continues to impact Singapore operations. However, Singtel notes “healthy growth” in ICT services led by NCS as customers accelerated their digitalisation efforts.

Pre-tax operating profit contribution by associates grew 3.2% while post-tax contribution was stable as reduced operating losses from Airtel, which reflected improved operating performance in India and Africa, were offset by declines from Telkomsel, AIS and Globe Telecom due to Covid-19 headwinds.

Singtel has proposed a final ordinary dividend of 2.4 cents per share, following the interim dividend of 5.1 cents per share which was partially settled via the issuance of shares in its scrip dividend scheme. The scheme will not apply to the final dividend though.

Overall, Singtel had declared total dividends of 7.5 cents per share for FY2021, representing 71% of underlying profit. In comparison, FY2020 saw total dividends of 12.25 cents per share.

As of May 31, shares in Singtel are trading at $2.41, 4.3% higher year to date.

Brighter outlook ahead

Despite the rough patch last fiscal year, analysts are positive on Singtel’s FY2022 outlook as they have all kept their “buy” calls on the stock.

Maybank Kim Eng with a lower target price of $2.81 from $2.88 admits that although Singtel’s results came in below expectation brighter prospects are in the works for Singtel. The lower target price, analyst Kareen Chan explains, is 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 Chan, noting that this strategic reset also provides Yuen with a clean slate to affect changes.

Chan also sees potential partial stake sales could include Bharti Airtel and Intouch.

Meanwhile, CGS-CIMB Research analyst Foong Choong Chen is hopeful about Singtel’s new strategic direction.

CGS-CIMB has lowered its target price to $2.90 from $3.10 as 2HFY2021 core net profit fell 22% y-o-y due to Telkomsel, Optus, Globe and Singapore. However, FY2021 core net profit is expected to beat the research house’s forecast by 8% due to smaller than expected Bharti losses.

Elsewhere, RHB Group Research has a more upbeat outlook on Singtel, raising its target price to $3.30 from $3.10. Despite underwhelming FY2021 earnings, the RHB Research Team likes the stock because its 12-month strategic review could result in partial divestment, partnership or business restructuring, positioning the group on a stronger footing to capture growth opportunities.

On the other hand, PhillipCapital is less upbeat on Singtel and has kept its “neutral” recommendation on the stock with a lower target price of $2.32 from $2.44 previously. 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.”

Nevertheless, Singtel is focused on longterm growth for the company.

“For FY2022, the group will continue to invest for medium to long term growth by leveraging its core competencies, while maintaining a strong balance sheet for a more active Capital Management Programme. The group expects dividends from the regional association to be approximately $1.3 billion and capital expenditure including 5G networks to be around $2.4 billion, comprising A$1.5 billion to Optus at about $800 million for the rest of the group,” says Lang, adding that Singtel plans to pay dividends of between 60% and 80% of underlying net profit for FY2022, barring unforeseen circumstances.