SINGAPORE (June 5): Singtel’s shareholders, having gotten used to the telco’s relatively generous dividends over the years, received an unexpected piece of news when its latest results were announced. For the FY2020 ended March, the company plans to pay a final dividend of just 5.45 cents per share, down from 10.7 cents in the previous few fiscal years. This will bring the total FY2020 dividend to 12.25 cents per share, versus 17.5 cents per share that was distributed in FY2019. Still, the dividend payout of 12.5 cents per share represents a payout ratio of 81% of Singtel’s FY2020 underlying net profit, or about $2 billion.
“This reduction in dividend payout is prudent to conserve financial headroom to cope with uncertainties in the current Covid-19 operating environment and the capacity to invest in 5G,” explained Singtel Group CEO Chua Sock Koong at the company’s results briefing on May 28.
There is no doubt that the Covid-19 pandemic has hit Singtel hard, given travel and movement restrictions in its markets have caused a “significant reduction in roaming and prepaid revenues”.
“This has been a challenging year, given structural shifts in the industry, already soft economic conditions, adverse regulatory outcomes in India and the onset of Covid-19 in the fourth quarter,” says Chua.
Despite these challenges, Chua says Singtel in 4QFY2020 “remained resilient and gained market share in mobile and fixed services in Singapore”. Its enterprise business also defended its market leadership in Singapore and the Asia Pacific, particularly in the cyber and cloud solutions space, while NCS, its regional ICT solutions provider, closed the year with a strong order book, she adds.
In 4QFY2020, Singtel’s earnings fell 26% to $574.4 million from $773.0 million in the same period a year ago. The fall in 4QFY2020 earnings was mainly due to a one-off spectrum charge of $302 million, as a provision made by Airtel, its associate in India.
Singtel also saw a 10% drop in quarterly operating revenue to $3.9 billion from last year’s $4.3 billion. The drop was largely due to lower mobile service and equipment sales revenues across Singapore and Australia. Overall, there was a fall in revenue across the board, including in its enterprise and digital life business units. Ebitda for the quarter also declined 12% y-o-y to $1.03 billion.
On a full-year basis, FY2020 earnings saw a 65% drop to $1.1 billion from $3.1 billion in FY2019, mainly due to Airtel’s exceptional charges for regulatory costs totalling $1.8 billion. This represents Singtel’s lowest ever full-year earnings since the stock was listed in 1993. Excluding Airtel, earnings would have been only 21% lower at $2.4 billion.
Operating revenue for FY2020 slid 4.8% to $16.5 billion from a year ago on the back of lower mobile service revenue and equipment sales, aggravated by the onset of Covid-19, as well as the weaker Australian dollar. Ebitda for the year dipped 3.2% to $4.5 billion on weaker performance in Australia, low margins on equipment sales, and the National Broadband Network (NBN) resale in Australia.
Performance of associates
To be sure, Singtel’s regional associates, which had generally underperformed in the last few years, seemed to have turned the corner, with pre-tax earnings increasing by 14% y-o-y to $1.74 billion in FY2020. This was led by Airtel recording 58.3% narrower losses and Telkomsel of Indonesia seeing a 10.6% earnings growth.
Airtel, which Singtel owns a 35.2% stake, reported losses due to price wars in India. Last year, Airtel was also slapped with a fine of US$3 billion ($5.5 billion), slightly less than the fine of US$4 billion slapped on rival Vodafone’s Indian unit. The fine on the telcos was for their long-running dispute with the Department of Telecommunications regulator over the definition of “adjusted gross revenue”. The fine translated to some $1.9 billion worth of losses for Singtel.
With this regulatory entanglement out of the way, Singtel is starting to feel more positive on Airtel’s prospects. For FY2020, Airtel’s performance improved following tariff increases in India last December and strong growth in the number of 4G customers while its African operations recorded double-digit revenue growth as well as margin expansion, currency headwinds notwithstanding.
At the results briefing, CEO International of Singtel Arthur Lang says, “We are very encouraged [by Airtel in India]. This is the second quarter where we saw sequential growth and it’s quite a convincing growth coming from Airtel across.”
“So, I would say that the situation in India seems to have stabilised. Of course, it is always too early to say, but with the industry structure having changed, we are encouraged,” Lang adds.
Telkomsel pulled in the biggest chunk of earnings among all associates, with $1.2 billion in pre-tax profit for FY2020.
The earnings growth in both Airtel and Telkomsel more than offset lower contributions from Thailand’s Advanced Info Service (AIS) and Singtel’s other associates, which saw y-o-y falls of 7.5% and 27.5%, respectively.
Too cloudy for guidance
In the face of economic and business uncertainties wrought by the coronavirus pandemic, Singtel, like StarHub, has refrained from giving a guidance for the coming year. “We will update the market when there are material developments or when there is greater clarity in the operating environment,” adds Chua, who also notes that the full impact on Singtel’s business from the Covid-19 pandemic will take “some months” to realise.
As at June 1, shares in Singtel are trading 1.2% higher at $2.52, giving it a market capitalisation to $41.15 billion and forward P/E of 15.3 times.
In its outlook statement, Singtel says it remains confident of its operations in Australia as the market has started to recover and believes that it is in a strategic position to gain market share in a profitable manner, due to its stronger coverage and pricing proposition.
However, Singtel’s management highlighted that the ongoing transition of Optus customers from hybrid coaxial cable (HFC) to the NBN will result in lower margins for its fixed business, given some 135,000 Optus customers have not yet migrated to the NBN.
On home turf, Singtel is also upbeat about the competitive landscape as it believes that the two nationwide licences should result in more rational pricing. As for 5G capital expenditure, Singtel says this will be recorded based on progressive rollout of the coverage.
Calls by brokers
Although Singtel’s FY2020 earnings came in rather lacklustre, many analysts are sticking to their “buy” recommendations.
DBS Group Research believes that Singtel’s associates will help Singtel accelerate further into FY2021, pushing the group into growth territory as recovery gets underway.
“Airtel should be the key driver as its ARPU rises from the 20–40% tariff hike which took effect in Dec 2019. We project Bharti to contribute $173 million pre-tax profit in FY2021, compared to a $403 million loss in FY2020,” says analyst Sachin Mittal.
While Airtel is expected to see growth, Mittal expects Telkomsel to record flattish earnings in FY2021 due to a potential loss of market share outside the Java region and cheaper data pricing in the Java region.
AIS is likely to see flattish earnings too on weak private consumption in Thailand, and Globe’s operations in the Philippines are unlikely to come under heave threat from new entrants.
CGS-CIMB Research’s analyst Foong Choong Chen is cutting Singtel’s FY2021 core EPS forecasts by 7.1% to 16 cents to factor in a larger hit from Covid-19. And after three years of earnings decline, Foong sees earnings recovery from FY2021 as a potential re-rating catalyst.
Currently, the stock is trading at a 5% premium to the Asian telco average and roughly in line with its 12-year mean.
RHB Group Research believes that the full brunt of roaming revenue weakness from lockdowns imposed globally will be felt in 2Q2020. As it is, Singapore’s mobile revenue fell 12% y-o-y in 1QFY2020, as roaming revenue dropped by 36%, coupled with lower sales of prepaid packs.
However, roaming aside, lockdowns and quarantines have impacted international voice traffic — but in an unexpected way, according to i3forum, a not-for-profit industry body that brings together the international carrier ecosystem to enable and accelerate transformation.
i3forum Insights, a market database for international voice services, says there has been a 20% increase in international voice traffic in March 2020, compared to the same month in 2019, while roaming traffic dropped by 30%. The average length of calls also increased by more than 30% in March and over 60% in April, compared to 2019.
Philippe Millet, chairman of i3forum, says, “The first half of 2020 has really shown the value that traditional voice delivers in challenging times. It remains critical for businesses and consumers.”
Meanwhile, RHB believes the recovery experienced by Singtel’s associates are intact, but the extended lockdown in India may crimp 1QFY2021 revenue momentum, due to the high dependence on traditional recharge methods.
