SINGAPORE (Feb 14): Singtel is bracing itself for weaker market sentiment as well as stiffer competition, as its reported Q3FY2020 earnings fell by a quarter from the year-earlier period, missing analysts’ expectations. The company has trimmed its guidance for the full year, again. Instead of expecting operating earnings to remain flat this full year, it is warning investors to brace themselves for a “low single-digit” drop.
“It’s been a challenging quarter,” says Singtel group CEO Chua Sock Koong on Feb 13, referring to sore points such as Optus, its Australia subsidiary, as well as overall weakness in the enterprise business, which serves large multinational corporations. Weaker-than-expected performance of its regional associates such as Telkomsel in Indonesia and AIS in Thailand did not help either, although others, such as Globe Telecom in the Philippines, did well.
For the Q3FY2020 to Dec 31, 2019, the telco reported earnings of $627.2 million, down 24% y-o-y. Revenue in the same period was down 5% y-o-y to $4.4 billion on the back of lower equipment sales, weaker business sentiment and spending and continued price erosion in carriage services.
The company’s “Digital Life” division, which is mainly the digital marketing business, Amobee, also did not perform well. Major clients cut spending on their social media marketing activities. Revenue dropped 15% y-o-y during the quarter to $321 million, although operating losses improved from $16 million to $8 million, thanks partly to cost-cutting.
While analysts have flagged Singtel as a defensive stock to hold amid the coronavirus outbreak, Chua prefers to indicate a more cautious stance, as there is no escape from weaker business sentiment. “The numbers that will be affected most obviously are the roaming traffic — both inbound and outbound — with the travel restrictions that are placed on Singapore and other countries,” she says.
Bill Chang, CEO of group enterprise at Singtel, hopes to capture more opportunities from corporate customers turning to cloud-based computing and video-conferencing. On the other hand, customers in travel, F&B, air transport, retail and hospitality are bracing themselves for a lower business tempo and earnings. Those in manufacturing, for example, face disruptions as their China-based suppliers halt work. “China is in pretty much a lockdown mode to deal with this coronavirus,” he says.
Even the SingTel subsidiaries less affected by the virus outbreak, such as in Australia, there are market-specific challenges. For example, following the merger of TPG Telecom and Vodafone Hutchison Australia last August, Optus is bracing for stiffer competition in the mobile market from the consolidation.
“We will continue to compete aggressively in the market,” says Optus CFO Murray King. “We think we’re well-placed, but we don’t take competition lightly and will continue to leverage our assets to be able to outperform the market.” Optus is facing tougher competition from new entrants in the enterprise market who often compete on price. Its strategy is to cut costs so as to retain its margins. In any case, it was able to add to win more contracts in the last quarter. “We will continue to ensure that we build up this momentum,” says Murray.
Singtel’s India associate, Bharti Airtel, meanwhile, is one bright spot — for a change. The brutal price war that has dogged that market for years ended late last year. And the impact has been quickly apparent. For 3QFY2020, Airtel narrowed its losses by 95% from INR230.4 million ($4.5 million) to INR10.4 million, marking yet another improving quarter, and lending optimism that this trend will continue.
Bharti’s balance sheet, following rounds of fundraising — including most recently, an oversubscribed US$3 billion ($4 billion) share placement and convertible bond issue last month — is now “rock-solid”, says Arthur Lang, CEO of Singtel International.
“Markets are very supportive and confident of the prospects of Bharti today. But again, we face some uncertainties moving forward and we have to stick very closely with the situation,” he adds.
Year to date, Singtel shares have dropped 3.5% to close at $3.28 on Feb 13. At this level, the company is trading at 36.5 times historical earnings which translates into a market value of $53.56 billion.
