Singapore’s telco sector is expected to see a brisk recovery as roaming revenues bounce back due to the reopening of borders and the resumption of air travel.
Apart from giving this a boost in roaming revenues and prepaid SIM cards, more consumers are embracing 5G to enhance their user experience, increasing uptake rates.
“I think the telcos will benefit from two particular drivers: 5G adoption and increased roaming activity,” says Maybank Securities’ head of research Thilan Wickramasinghe, who expects average revenue per user (ARPU) to increase for the major telcos.
“And at the same time, we are seeing companies like Singtel, which have a significant amount of latent assets, looking to offload that and restructure those assets and refocus their business towards more ICT around the region. These also should drive overall longerterm margin and volume growth for the sector,” adds Wickramasinghe.
Although inflationary pressure is the talk of the town, Wickramasinghe believes the telcos can pass on 30% to 50% of the higher costs to consumers as they can raise average selling prices (ASPs), resulting in limited damage.
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Improved earnings for telcos
In its latest 1QFY2022 ended June, Singapore Telecommunications (Singtel) reported 41.3% higher y-o-y net profit of 4628 million, lifted by improved operational performance and exceptional gains from Bharti Airtel and dilution of the group’s effective shareholding in Australia Tower Network.
In 1QFY2022, Singtel’s underlying net profit rose by 10.7% y-o-y to $499 million. Despite posting higher net profit, Singtel’s operating revenue fell 5.6% y-o-y to $3.58 billion due to the absence of contributions from NBN migration and Amobee, which was classified as a “subsidiary held for sale” as at March 31. The depreciation of the Australian dollar also contributed to the lower operating revenue.
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Share of regional associates’ post-tax profits saw a 12.2% y-o-y growth to $411 million, led by a strong improvement from Airtel, which saw robust 4G customer additions in India and benefitted from tariff hikes.
Singtel’s group CEO Yuen Kuan Moon sees the improvement as a sign of the group’s progress on its strategic reset, which kicked off last May. The reset aims to strengthen the group’s core, unlock the value of its assets and grow new digital businesses.
“Our growth engine and info-communications technology (ICT) arm National Computer Systems (NCS) booked $600 million in new projects across various sectors and we’ve made the requisite investments to strengthen its capabilities and competitive edge to deliver long-term growth,” says Yuen.
Singtel’s operating revenue and ebitda In the local consumer segment improved on the back of higher traveller numbers. Operating revenue increased 3.4% y-o-y due to higher mobile service, fixed broadband and equipment sales but partly offset by lower TV revenue.
However, the reopening boost may be shortlived as Yuen expects the operating environment to “remain challenging” amid the rising inflation and interest rate environment, along with ongoing geopolitical tensions. “We will need to stay nimble and contend with these realities should they put further pressure on our costs and bottom lines,” he says.
StarHub too saw some growth in its latest financial results for 1HFY2022 ended June. Although earnings came in 10.3% lower y-o-y at $60.9 million, revenue was 8.7% higher at $1.1 billion. StarHub’s CEO Nikhil Eapen says the group had incurred significant costs to fund its DARE+ strategic transformation, which was announced last November.
Expected to span over five years, the transformation is expected to double down on digitalising everything StarHub does, accelerating value creation, realising growth without frontiers and delivering a pipeline of new experiences to its customers. However, the group will have to incur some costs to achieve this goal, says Eapen in the group’s FY2021 earnings briefing.
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Speaking to The Edge Singapore, Eapen explains that most of the group’s costs relating to its transformation strategy will be recorded in 2HFY2022. This means despite 1HFY2022 doing better than expected, StarHub will be maintaining its FY2022 guidance.
“We were very clear when we announced DARE+ last November and during our FY2021 guidance in February that we wanted to compress our investment period so that we could accelerate the return on those investments while phasing out our older investments from many years ago,” says Eapen.
Having said that, Eapen expects FY2023 to be a “crossover year” when ebitda will return to FY2021 levels and continue to trend higher in the years that follow.
He says: “For the postpaid segment, we are excited to see early signs of recovery in roaming, and we expect this to accelerate as international travels gain traction. At the same time, we also hope to see recovery for the prepaid segment as more inbound travellers and foreign workers enter Singapore.”
In 2QFY2022, StarHub consolidated MyRepublic Broadband, which contributed to the 21.5% y-o-y growth in broadband revenue to $115.8 million in 1HFY2022. The consolidation contributed some $12.6 million in revenue.
StarHub is also placing a focus on its entertainment service segment. The group has expanded both its Pay TV and over-the-top (OTT) content subscriber base in 1HFY2022 with more offerings, leading entertainment service revenue to increase 4.6% y-o-y.
Recently, StarHub launched its English Premier League (EPL) package with vastly lower prices and no contract lock-ins, a first in the local EPL broadcasting scene. The group in February had won the rights to broadcast EPL for six seasons from the 2022/2023 season which started last month.
Although the win came on the back of falling EPL subscribers, Johan Buse, StarHub’s chief of consumer business, says: “We believe there is an unserved segment in the market [and] by making it affordable, we are convinced many more fans in Singapore will take the opportunity to watch the Premier League.”
M1, which was delisted and is now part of Keppel Corporation, has also seen good growth, according to the latter’s latest 1HFY2022 ended June financial results. M1’s earnings rose 62% y-o-y, underpinned by strong execution of its transformation plans and continuing growth in the enterprise business, coupled with the increase in roaming and prepaid revenues with the progressive reopening of economies.
In its results review, Keppel says: “M1 continues to make good progress in its 5G standalone network roll-out, having achieved more than 80% outdoor coverage as at end-June 2022. M1 is also actively collaborating with other Keppel business units and industry partners to create smarter, future-ready solutions and more 5G use cases.”
What analysts are recommending
Singtel seems to be the favourite among the analysts who have kept their “buy” calls on the stock as they remain bullish about its latest FY2023 results and its divestment of a 3.3% stake in Bharti Airtel for $2.25 billion as part of the group’s asset-recycling efforts.
Maybank’s preferred pick within the sector is Singtel. Analyst Kelvin Tan says Singtel’s prospects remain bright in FY2023 due to several catalysts. He is forecasting a three-year (FY2023–FY2025) earnings CAGR of 15% to reflect the group’s monetisation of 5G, potential Trustwave divestment and growth in NCS and regional associates.
The analyst notes that Singtel’s Australian associate Optus has also adjusted its legacy price plan to account for inflationary pressures, which effectively lifts the ARPU of Optus’ consumer business by 7%–10%. Tan expects an improvement in mobile service ebit of 5.6% y-o-y and an ebitda margin growth of 2.8 percentage points y-o-y in FY2023.
“Amid rising interest cost and intense competition, Singtel has begun its growth journey while shareholders. Core business segments in Singapore and Australia are gradually recovering following the resumption of foreign travel,” says Tan, noting that rising contribution from associates will further support earnings growth.
RHB Group Research has decided to stand pat on its “buy” recommendation with a target price of $3.55 as the research house is upbeat on Singtel’s mobile resurrection.
“Singtel’s 1QFY2023 results came in light but earnings should pick up momentum in 2HFY2022. We see a further improvement in roaming traffic and prepaid sales, from higher tourist arrivals alongside stronger enterprise contributions. Singtel remains our preferred telco pick on its positive earnings execution and the unlocking of latent value from asset monetisation exercises,” says RHB. On the other hand, most analysts are keeping their “hold” calls on StarHub, as analysts are concerned about increasing mobile competition, lagging post-paid revenue and higher capex from the group’s DARE+ investment costs.
Maybank’s Tan has an unchanged target price of $1.32 on StarHub. While he is upbeat about the group’s improving numbers for 1HFY2022, he remains wary of ongoing concerns about near-term cost pressures.
“We see potential in the return of high margin roaming and incoming EPL revenue providing major earnings tailwinds for 2HFY2022. However, earnings are expected to be weighed down by increasing mobile competition, lagging post-paid revenue and higher capex from front-loading investments (IT and content) as part of the DARE+ transformation roadmap. As such, we think that ebitda margins are expected to deteriorate over the next two quarters,” says Tan.
RHB has lowered its target price to $1.20 from $1.29 for StarHub while keeping its “neutral” call, as results fell short of estimates.
“While the positive revenue trends were sustained, the expected surge in opex and capex related to its DARE+ transformation initiatives will weigh heavily on its bottom line,” says the RHB research team, who expects the DARE+ costs to soar higher in 2HFY2022.
The research team also notes that StarHub’s mobile revenues were distorted by one-off accounting standard adjustment on handset subsidies. That aside, the research team believes that StarHub’s entertainment and broadband segments are “moving in the right direction” while remaining positive on recovering roaming revenues and a higher 5G subscriber base.
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