In a way, Singapore Telecommunications’ (Singtel) multi-market presence has given it flexibility in funding capex when rolling out its 5G networks in different markets. In Singapore, the bulk of that spending has been completed. Most of the future 5G expenses set aside will be for maintenance. However, in Australia where the 5G network covers a much wider area, Singtel’s subsidiary Optus is just about to enter the peak spending phase.
CFO Arthur Lang says that instead of going head-on to cover as much ground as incumbent Telstra, Optus will spend “smartly” where it makes the most sense for its customer base.
Indeed, the innovative nature of the telco or tech industry means that there is a constant need to upgrade. Mobile operators are at present busy trying to fund 5G networks. But for some, they had barely finished paying for 4G capex, which, in turn, was an upgrade from 3G. As it is, the network equipment providers, with obvious self-interests, have started painting visions of a wonderful 6G world.
As advanced mobile networks gain strategic value in geopolitics, governments, including that of Singapore, have taken an active interest. On Sept 19, the Infocomm Media Development Authority (IMDA), the telco industry’s regulator, announced it was partnering with the Singapore University of Technology and Design (SUTD) to make the city-state a “global node” in the 6G R&D, specifically, via the launch of the Future Communications Connectivity Lab at SUTD, which will look at emerging technologies such as holographic communications and intelligent sensing capabilities to support the next generation of self-driving cars and drones.
What about Singtel then? Although capex pressure on the telco may vary according to time, the cost of next-gen networks is expected to get more expensive. Is there a need to look at a new model of funding capex more sustainably?
The telco industry can perhaps learn a thing or two from the semiconductor industry, which requires equally huge, if not bigger, capex on a regular basis. Recently, market leader Intel Corp announced that Brookfield Infrastructure Partners, a Canadian asset manager, will co-fund the building of one of its new plants in Arizona which costs US$30 billion ($43.4 billion). This will give Intel control over the manufacturing asset while releasing some US$15 billion in free cash flow over several years that can go towards dividend payments. Intel also says it aims to replicate this same funding model with the help of other investors.
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Singtel’s Lang points out that at this point, Singtel’s funding needs for 6G are “far, far away”. For many markets, operators are still in 4G, and a smaller number are getting off the ground for 5G. One key reason is the less discernible difference for consumers. The leap from 3G to 4G is “very clear” but the corresponding jump from 4G to 5G is less so when it comes to applications that do not require much bandwidth like watching a streaming video on a smartphone. Rather, the really exciting use of 5G networks is in the business space, where its bigger capacity and higher speed can be used to control machines, equipment, and vehicles over large areas. “So, 5G is just starting and 6G is still way ahead, and mainly conceptual,” says Lang.
Nevertheless, without making direct reference to what Intel did, Lang says Singtel is always thinking about how to lower the cost of capital for its shareholders. After all, the telco business, which is similar to property development, is very capital-intensive. Telcos need to spend money upfront to roll out the mobile networks. Similarly, when developers build a new project, they would look for the most efficient way to fund it as they would not be able to generate returns for the first few years. Lang should know. Before Singtel, he was the CFO of CapitaLand, the government-linked property group that has been blazing the trail for the rest of the real estate industry with its active capital management.
In a way, Singtel has already gone ahead with a smarter funding model. Last October, Singtel sold 70% of its Optus mobile towers portfolio to state pension fund, Australian Super for A$1.9 billion ($1.76 billion). With the deal, Singtel receives the proceeds upfront and retains the use of the towers, while the investor receives a steady income stream. “They are very patient capital; they have a horizon of maybe 50 years or so. That’s the kind of partners we want, who see the growth potential of our business, and share the capital load with us,” says Lang.
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Besides funding 5G capex, another big draw on Singtel’s resources has been the string of acquisitions made by its IT services arm, NCS, over the last couple of years because it has been tasked to help Singtel capture growing demand from companies trying to raise their digital capabilities.
Last year, NCS spent at least A$615 million in Australia to acquire two companies to beef up its range of products and services across the region. With the acquisitions, NCS now has a “very meaningful presence” with 2,000 employees and the ability to win contracts from both public and private sector clients.
NCS is focused on integrating the various new acquisitions into a cohesive organisation. Besides having a presence in Singapore and Australia, NCS has so-called “delivery centres” in China, India and Vietnam.
According to RHB’s research team in its September report, NCS and Singtel’s other enterprise businesses will see headcount grow from around 12,000 now to 20,000 over the medium term. With an FY2022 ended March revenue of $2.4 billion, NCS is aiming for $5 billion by FY2026, or a CAGR of 21%.
Elsewhere, Singtel is busy with local partners in Thailand and Indonesia to grow the data centre business together. “This is not just building a specific project. Singtel is building a platform where it is the operating partner,” says Lang, adding that it could even bring in even more partners.
Again, the data centre business is a potentially valuable operating asset waiting for its value to be unlocked. Lang says the Singapore data centre business, with a running capacity of 60MW and another 60MW in the pipeline, generates some $250 million in revenue. It enjoys an ebit margin of about 60%, or $150 million. By applying a rather conservative valuation of 20 to 30 times, the data centre business is worth at least $3 billion. “I think this is where we will put more capital to work,” says Lang.
Photo: Singtel
