A turnaround may be on cards for Singapore Telecommunications (Singtel). In FY2022 ended March, despite lower revenue of $15.34 billion, the telco reported higher earnings of $1.95 billion due to an exceptional gain from divestments.
In FY2021, Singtel was forced to write down the value of digital advertising platform Amobee, which according to CFO Arthur Lang, is poised for sale. Another underperforming unit, cybersecurity brand Trustwave has effectively been cut up and parts still deemed of value absorbed.
More importantly, Singtel is seeing operational improvements or as group CEO Yuen Kuan Moon calls “solid performances” — thanks to its network of overseas mobile associates like Bharti Airtel in India. In total, the overseas associates improved their pre-tax earnings contributions by 21% y-o-y to $2.07 billion.
For Singapore, Singtel says mobile service revenue are showing signs of recovery with the return of business and leisure travel while there is strong demand for the services of its enterprise arm NCS due to the push by governments and companies to digitise. This momentum is expected to continue into the new financial year, it adds.
Previously in FY2021, mobile service revenue for the consumer segment fell due to supply chain constraints, which affected the delivery of more flagship handsets, as well as the decline in the foreign worker population in Singapore.
“In the past, prior to Covid, we did command the lion’s share of that [the foreign worker] market but 200,000 workers left Singapore with no replacement,” says Yuen. “Hopefully, with the return on foreign workers especially in the construction industry, we will recapture some of that lost share.”
See also: Singtel denies report it is 'exploring options' over Australia unit
With the FY2022 results, Singtel has declared a final dividend of 4.8 cents per share. Together with the interim dividend of 4.5 cents per share, ordinary dividends for the whole fiscal year would total 9.3 cents per share, representing a payout ratio of 80% of underlying net profit and a growth of 24% y-o-y.
Revving up growth engines
It was last May when Singtel announced a strategic reset, saying the company intends to capture untapped digital growth in the 5G era, sharpen its focus and improve shareholder value.
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Indeed, Singtel’s earnings have been on a slide since FY2018 as stiffer competition, slower growth, the onset of the pandemic and bad investments in new business areas weighed down the bottom line at various points in time.
Leading this strategic reset is IT services arm NCS, which recently spent $615 million to make four acquisitions in Australia, namely, digital services firm ARQ Group; The Dialog Group, Australia’s largest privately-owned IT services company; cloud consultancy firm Riley; and cloud transformation specialist Eighty20 Solutions.
Yuen says these give NCS the scale and credibility to compete in new markets while “the acquisition of Dialog and ARQ will approximately add $300 billion in annual revenue and we expect to create a bigger impact in the Australian IT services market”.
Lang says the current focus for the Australia acquisitions is to integrate them. “We will continue to look at opportunities around and actually continue to grow that business in line with the whole digitalisation trend.”
Aside from NCS, Singtel has identified three growth engines that will help propel the group — 5G, data centres and digital banking.
For 5G, the company aims to still grow its market share by offering the fastest 5G speeds to over 480,000 subscribers in Singapore and 2.3 million in Australia. Yuen adds that Optus is offering differentiated services in Australia, namely, its “living network” service.
As for the regional data centres, Singtel is intending to focus on the three fastest-growing markets in Asean, namely, Singapore, Thailand and Indonesia, with a total addressable market of US$4.4 billion ($6.04 billion). “We shall leverage on our operating know-how and experience in Singapore to co-build data centres in the region,” Yuen says.
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In Singapore, Singtel is building a new 60 megawatt (MW) integrated cable landing and data centre facility, with a 30–40 MW expansion in the pipeline. This will bring in an estimated $150 million in ebitda per year.
Elsewhere, Singtel has partnerships with Telkomsel in Indonesia, as well as AIS and Gulf in Thailand to expand its data centre business in the respective countries.
Meanwhile, Singtel is also focused on growing its presence in the digital banking space with its joint venture partner Grab. It aims to have a “rapid regional expansion” into Indonesia and Malaysia as well as launch its digital banking service in Singapore in 2H2022.
Already, the joint venture (JV) company has won the full digital banking licence in Singapore and Malaysia in 2020 and on April 29 respectively.
Lessons learnt
Singtel is adamant about seeking partnerships when venturing into businesses that it is not entirely familiar with. Unlike its previous investments in Trustwave and Amobee, where it ventured into an unfamiliar space alone, Singtel does not want to make a similar mistake again.
“The lessons learnt from the past are these few things, [going into] areas that we’re familiar with, businesses that we’re familiar with, going in with partners as opposed to going it alone,” says Yuen.
Yuen revealed that the growth in the growth engine areas will be financed via asset recycling, capital partners and some debt. Singtel has identified some $3 billion worth of assets to be recycled in the near term. This includes the June 1 announcement of the redevelopment as well as sale and leaseback of its corporate headquarters at Comcentre which will be done in partnership with Lendlease.
Under this partnership, Lendlease will subscribe to 49% of the shares in its JV with Singtel in 2024, while Singtel holds the remaining 51%. The JV company will pay $1.63 billion to Singtel for the land cost of the development while Singtel will fork out the remaining sum for the redevelopment. Singtel as the anchor tenant is expected to occupy 30% of the redeveloped property.
As Singtel realises the value in this property and continues to execute its asset recycling strategy, India’s Economic Times on May 26 reported that it is mulling divestment of its stake in Bharti. However, Singtel has since refuted the suggestions. “We’ve held our stake in Bharti for almost three decades, and it’s a core part of our international portfolio,” says Lang.
Nevertheless, Paul Chew, head of research at Phillip Securities, believes that a partial sale is a possibility that should not be ruled out down the road. “It is to signal Bharti’s value, given Singtel’s holding company discount,” says Chew in an interview with The Edge Singapore.
Lang sums up Singtel’s objectives with the strategic reset: “One of our key objectives is to really focus on the big holding company discount, which Singtel suffers from. Our international portfolio is a very large number but it’s not being reflected in our share price. So, one of the key objectives of the strategic reset is to illuminate the value of our assets.”
What analysts are saying
Analysts are generally bullish about Singtel given its improved FY2022 report card. All have kept their “buy” calls on the stock, with OCBC Investment Research, PhillipCapital and RHB Group Research raising target prices too. On the other hand, Citibank and CGS-CIMB have cut theirs while UOB Kay Hian has maintained its fair value.
RHB says investors should “look beyond the earnings miss”, noting that FY2022 core earnings rebounded after four consecutive years of decline. As such, they think that “the recovery thesis remains intact with the reopened borders fuelling a rebound in roaming and mobile revenues”. RHB has Singtel as its top Singapore telco pick, with an FY2022–2024 CAGR forecast of 22% and potential catalysts from its capital recycling and strategic business reset.
Meanwhile, UOB Kay Hian, with an unchanged target price, expects Singtel to “fare well” in FY2023 thanks to positive momentum from Optus consumers, as well as higher prepaid and roaming revenue with borders reopening. This is in addition to NCS’s double-digit growth trajectory and its capital recycling, with $3 billion of potential asset monetisation.
Analysts who trimmed their target price have raised concerns about Singtel’s earnings and recovery heading into FY2023. Citibank says there is “no denying the soft FY2022 close”, and called the results “admittedly weak”. Its analysts say that Singtel’s 2HFY2022 faced across-the-board softness with mobility and travel restrictions in place across the region following the unexpected Omicron wave. Regional associates also saw material pressure in FY2021– 2022 with reduced prepaid consumer spending owing to lockdowns, contributing to FY2022’s earnings miss.
The anticipated roaming and enterprise recovery, which had been relevant for Singapore and Australia, were also delayed given the travel conditions. However, Citi does see “light at the end of the tunnel,” as Singtel’s key markets have seen the benefit of local and international re-openings as they adopt endemic strategies.
While CGS-CIMB has cut its target price, analysts Foong Choong Chen and Sherman Lam Hsien Jin call the telco’s dividend for the 2HFY2022 a “positive surprise”. They also see improving prospects in Indonesia on the back of easing competition, with various players optimising tariffs from March to April. However, it is less optimistic about Optus’ earnings in FY2023 due to a further drop off in NBN (National Broadband Network) migration fees but higher depreciation and net finance costs.
