• 3Q24 earnings were within expectation. 9M24 revenue and EBITDA were 73%/75% of our FY24e forecast. Currency was almost a 2% point drag to earnings.
• 3Q24 associate contribution disappointed with an 8% YoY decline to S$374mn. Airtel Africa suffered a YTD24 translation of S$130mn following a massive depreciation of the Nigerian Naira during the quarter. Direct stake in Airtel Africa has been divested.
• We maintain BUY with an unchanged target price of S$2.80. We lowered our associate earnings by 10% due to the weakness in Airtel Africa. But this was offset by a lower finance expense assumption. Our FY24e PATMI is reduced by 3%.  We expect an upside surprise in EBITDA margins in 4Q24 if Singtel can deliver its S$200mn of cost out by the end of FY24. Mobile price repair is underway in multiple countries where Singtel operates. We expect this to drive earnings together with plans to monetise S$4bn of assets further. 

The Positive

+ Early mobile price repair in Australia. Optus postpaid ARPU of A$42 is the highest in more than four years. We believe price repair is underway. Competition, especially for entry-level price plans, has eased, and prices are edging higher. Despite the network outage, mobile service revenue grew 3.4% YoY.

The Negative

- Airtel Africa currency hit. Contribution from Bharti Telecom declined 23% YoY to S$87mn. Operations in India grew 14% YoY supported by an 8% rise in ARPU to Rp208. Currency took a toll on the results, with a 4% decline in the rupee against the Singapore dollar. A translation loss hit Africa operations due to the weakness in the Nigerian Naira.

Outlook

We expect mobile price recovery in Australia, India, Thailand, and Indonesia to drive earnings growth. An upside surprise in margins will stem from Singtel’s planned S$600mn reduction in core cost, largely in Optus.

Maintain BUY with unchanged TP of S$2.80

Our SOTP valuation is based on 6x EV/EBITDA (in line with peer valuation) for Singtel’s core Singapore and Australia businesses, and associates are marked to market after a 20% discount to reflect volatility in their share prices.

• 1H24 revenue and EBITDA were within our expectations at 46% of our FY24e forecast. EBITDA declined 5% YoY to S$1.78bn due to an 11% contraction in Optus earnings. Underlying net profit rose 11% to S$1.12bn despite a 4% point drag on currency.
• Singtel increased interim dividends by 13% to 5.2 cents and revised higher its payout ratio from 60-80% to 70-90%. A 3-year programme to remove S$600mn (of S$200mn p.a. FY24-26) of indirect cost was announced.
• We maintain BUY with an unchanged target price of S$2.80. Our earnings are largely unchanged before incorporating exceptional items. We believe Singtel is making significant strides in restructuring the entire group, monetising assets, and shedding unprofitable entities. Mobile competition in Australia is not abating and Optus needs to realign its cost structure to this reality. Underlying net profit in 1H24 fell 69% YoY to A$13mn.

The Positives

+ Increase in dividends and payout ratio. Singtel raised interim dividends by  13% to 5.2 cents. The company also increased its committed dividend payout ratio to 70-90% of underlying net profit (prev. 60-80%).  Supporting dividends was FCF (plus associate dividends and lease payments) of S$817mn (1H23: S$1.29bn).

+ Strong margin expansion at NCS. NCS is beginning to contribute more significantly to group earnings. EBITDA expanded 24% YoY to S$136mn from revenue growth and cost optimisations. NCS booked S$1.4bn in orders in 1H24 (1H23: S$1.3bn). Much of the growth was outside the traditional government sector.

The Negative

- Still stubborn cost structure at Optus. Optus EBITDA declined 3% YoY to A$1.03bn despite revenues growing. There was an almost 50% jump in utility cost or an additional A$24mn. It was encouraging that staff costs have started to stabilise. 1H24 underlying net profit fell 69% ToT to A$13mn on lower operating earnings and higher finance costs. There was a staff restructuring cost of S$21mn under exceptionals, but which division was not disclosed.

Outlook

We believe management’s restructuring strategy is beginning to yield results:

• Of the planned $6bn of assets to be monetised in the near-term S$2bn has been unlocked*.
• Re-organising the group and resources into growth sectors has seen improvement in earnings at NCS and monetisation of the digital infrastructure division.
• Closure of Hooq (Mar20), divestment of Amobee (Jul22) and Trustwave (Oct23) has removed an estimated S$200mn of operating losses.
• The planned S$600mn cost out programme (or removal of S$200mn p.a. of indirect cost) from FY24 to FY26, will be a key initiative to lower fixed costs, especially at Optus.

Maintain BUY with unchanged TP of S$2.80

Our SOTP valuation is based on 6x EV/EBITDA (in line with peer valuation) for Singtel’s core Singapore and Australia businesses, at S$0.90/share. Associates are marked to market at S$1.90/share after a 20% discount to reflect volatility in their share prices.

• 2023 Investor Day: Mobile price recovery is underway in India, delayed in the Philippines and Thailand and likely in Indonesia. Australia and Singapore face challenges due to low-end competition by MVNOs.
• Growth drivers for Singtel include fixed broadband (Indonesia, India and Thailand), data centres and NCS. There is an upside to ordinary dividends with S$2bn of excess cash yet to be returned. Generative AI will soak up data centre supply even faster due to the spike in power and cooling requirements.
• Our BUY recommendation and SOTP TP of S$2.80 are maintained. We believe earnings have troughed as mobile prices start to edge up higher and new growth engines gather scale. The downside will depend on Optus's ability to rationalise cost to cope with the unrelenting price competition. Other catalysts for Singtel include the disposal of loss-making Trustwave, paring down of associate stakes (to narrow holding co-discount) and monetisation of fixed assets (towers, real estate) and other businesses (IPO).

Key Highlights from Singtel Investor Day 2023

1. Corporate

CEO: Unwavering focus on strategic reset

1. Consolidation amongst mobile operators is underway and healthy for the industry. For Singtel, 4 of the 6 countries they operate have consolidated. In Singapore, Singtel is not allowed to become the consolidator.
2. With mobile market repair, ARPU and EBITDA margins are improving such as India, Thailand and Indonesia.
3. 5G is not up to scale but you do see early adopters at the Hyundai factory deploying robotics at a commercial level to assemble cars and not just trials. Other adopters are aviation and ports. Singtel’s Paragon 5G software has been developed with interest from North American and European telcos.
4. GXS digital bank was launched in August 2022 and deposits were even rolling in too fast. Malaysia and Indonesia are the opportunities with a target launch date end 2023.
5. Fibre broadband penetration is low at 10-17% and will be a high growth area for the next five years. There will be synergies and momentum with bundling with mobile phone plans.

CFO: ROIC, growth and monetisation (to rerate share price)

1. Will “double down” (capital) in the growth engines of digital infraco and NCS. Telco industry EBITDA has been lost and will never be replenished. Singtel will focus on new growth areas.
2. Current ROIC is 8% (excluding Optus goodwill or ignoring the purchase price of Optus) with the target of low double-digits by FY26. Drivers to ROIC improvement are increasing efficiencies for Optus and Singtel SG; sale of loss-making businesses (e.g. Trustwave with EBIT loss of S$100mn p.a.); reduced capital intensity and improvement at Airtel.
3. On NCS and regional data centre (RDC), the combined EBITDA contribution to rise from 12% to more than 20% by 2028 of Group EBITDA. This implies outpacing the growth of matured telco businesses by only 1.6% points per year (including acquisitions). The current market is not conducive to IPO, but NCS or RDC can bring in 20-25% stake partners.

1. On the associate stakes, Singtel will look to pare down the stakes but not completely dispose them. There is S$50bn in value in the associate stake which can be reallocated to growth areas.
2. There is more latitude to raise ordinary dividends with the S$2bn excess cash (or 11 cents) in operating cash flow not paid out. Will not borrow to pay dividends.

1. Subsidiaries

Optus: MVNOs the formidable 4^th operator

1. Tier 2 brands or MVNOs have been capturing market share by 5.7% points from 19.7% in 2019 to 25.4% in 2022. This was despite Optus purchasing the largest MVNO amaysim in 2021 for A$250mn.
2. MVNOs value proposition is lower prices with a Telstra network for coverage. Telstra has a sticky postpaid market share of 50% share and uses wholesale to take the lower-tier plans. The trend of the 40 MVNOs capturing more share or customers trading down is unlikely to stop unless downtrading hurts Telstra or prices come down to wholesale cost. Telstra's wholesale price arrangement with MVNOs can be revenue share, fixed fees, etc.
3. The deteriorating consumer confidence is also causing a trade-down effect. Any price repair in the industry will be anchored down by the MVNO prices.
4. Optus is competing in mobile service innovation. These include donating data plans to the underprivileged, the ability to pause network connection (for the whole household), mobile turbocharge during congested periods, unlimited data days, call translation between speakers, call notes, subhub to consolidate all content providers and smartspace experts to install a well-connected home for customers.

Singtel Singapore: Merging consumer and enterprise for cost and revenue synergies

1. The ROIC is healthy at low20% but still working on cost synergies at the operating and capital expenditure level post the integration of both businesses.
2. Mobile ARPU is down despite an uplift in roaming due to SIM-only plans. EBITDA is a better gauge.
3. On consolidation of mobile operators, regulators could be more understanding and voicing an opinion. If it does happen, Singtel will be the major player.
4. Hyundai is using 5G for their Ionic 5 assembly in Singapore and requires only 10 workers in the factory. Robotics can help resolve labour and union issues. 5G is better than WiFi due to low latency. WiFi performance also degrades when more devices are connected. If successful, other models could be assembled in the Singapore plant. Micron is also using 5G for detecting faults. 5G can also provide slicing for security purposes or reserved bandwidth for emergency cases.
5. Other countries are still pacing out their 5G rollout because the application is not here yet. But 5G can raise prices when transitioning from 4G. 5G penetration is now 40%. Any mass adoption of 5G still relies on the consumer market.

NCS: Targeting key sectors

1. Started in 1981, it is the largest systems integrator in SE Asia with more than 12,000-strong workforce and more than 4,000 ongoing projects. The top 30 clients provide 70% of revenue and more than 10 years of relationship. The target is S$5bn revenue in three years from current S$2.7bn. This likely includes acquisitions after completing the recent acquisition of Australian businesses.
2. EBITDA declined in 2022 due to the acquisition cost of four companies in Australia to penetrate the market, and a one-off wage increase in the middle of last year but the situation has settled down and there are investments to change the model to three strategic focuses. The book to bill is 1.02.
3. The government sector customers are stat boards, ministries, defence and homeland security. NCS is essentially the tech partner of the government. Some projects include tax collection solutions, IOT sensors in the housing estate, smart lighting/lifts/sensors, robotics for surveillance, and data analytics for the tourism sector. 

• 1Q24 revenue and EBITDA were within expectations at both 23% of our FY24e forecast. The 9% decline in the Australian dollar and drop in Optus margins were the drag on earnings.
• Maiden disclosure of the Digital infraco (data centre, submarine cable, satellite), reflected an 11% YoY growth in EBITDA from higher pricing and satellite deployment services. Meanwhile, Bharti registered a 34% YoY growth in earnings to S$112mn.
• Optus remains the weakest spot for the group with EBIT declining 28% YoY in local currency terms to S$56mn. Despite the larger revenue and market size, Optus EBIT is only 23% of Singapore operations. We incorporated a modest decline in our FY24e revenue and EBITDA estimates by 2% to account for the weakness in the Australian dollar. The SOTP TP is lowered to S$2.80 (prev. S$2.84). We upgrade to BUY from ACCUMULATE due to recent price weakness. Valuations are attractive but any re-rating for Singtel will come from its S$6bn asset monetization efforts, better cost controls at Optus, mobile price restoration and broadband growth.

The Positives

+ Stellar performance for Bharti. Bharti registered a 33% rise in profit after tax to S$112mn. The key driver to earnings was the 9% YoY increase in mobile ARPU in India to Rp200. Customers are looking to premiumize their mobile pricing plans to 4G smartphones and from prepaid to postpaid. The earnings growth at Bharti was before the exceptional loss of S$114mn from a devaluation of the Nigerian Naira (14 June) and fair value loss from its foreign currency convertible bonds.

+ Digital infraco, the new source of growth. The newly disclosed digital infraco reported an 11% rise in EBITDA to S$62mn. Earnings were driven by higher prices in the data centre and satellite deployment services.

The Negative

- No respite at Optus. Optus EBITDA was hurt by a 9% decline in the Australian dollar. EBITDA margin was down 1.8% points from higher wages and electricity costs. Competitive pricing and a weakening in consumer sentiment are also placing pressure on mobile ARPU.

• FY23 revenue met our expectations at 103% of FY23e estimates. EBITDA was 96% of estimates. Australian dollar weakness of 7.4% YoY in 2H23 was a major drag to earnings.
• 2H23 underlying PATMI grew 11% to S$1.05bn. Almost all the growth came from lower depreciation and amortisation of S$90mn. Optus remains the major drag in earnings with its paltry ROIC of ~2% and 2H23 net profit of only A$7mn.
• We left our FY24e revenue and EBITDA relatively unchanged. Our SOTP TP of S$2.84 and ACCUMULATE recommendation is maintained. Capital management remains the largest upside with planned capital recycling of S$6bn, including disposal of Trustwave, redevelopment of Comcentre and partial monetisation of infrastructure assets (datacentre, satellite, submarine cable). Any longer-term re-rating and improvement in ROIC will include a more significant return to profitability for Optus.

The Positives

+ Re-opening boost for Singapore mobile. Mobile service revenue increased 13% YoY to S$431mn from higher ARPU (+9%) and subscribers (4%). Increased travel boosted the lucrative roaming revenue. There is further room to recover as current roaming is 60% of pre-pandemic levels. Another initiative to boost ARPU is to remove the lowest-tier pricing plans.

+ Continued strength in Bharti earnings. Earnings contribution from Bharti rose 44% YoY to S$213mn. Earnings benefited from higher ARPU (+8% YoY), increased data usage and strong 4G subscribers (+12%). However, the pace of growth should stabilise as ARPU is flat QoQ at Rp193.

The Negative

- Challenging profitability at Optus. Excluding the one-off NBN migration revenue, 2H23 EBITDA is up 1.6% YoY to A$1bn. Bulk of the revenue growth in 2H23 was from low margin equipment sales that rose 16% to A$839mn. We believe Optus is struggling to achieve any economies of scale. Indirect (non-revenue related) cost is rising in line with service revenues. The A$4.5bn of capex over the past three years has so far not generated much additional growth in revenue, in our opinion*. Meanwhile, depreciation and interest expenses are stubbornly high despite the de-gearing exercise from the sale and leaseback of its passive infrastructures completed in FY22.

• 9M23 revenue met expectations at 73% of our FY23e estimates. EBITDA was below at 67%. There was an 8% point drag from the weaker Australian dollar. Underlying PAT rose 18% YoY to S$532mn, supported by a 23% rise in associate profit to S$407mn.
• Bharti net profit spiked 151% YoY to S$113mn, despite a 7% decline in the Indian Rupee. Optus operating metrics were stable post the cyber-attack in September.
• We lower our FY23e revenue/EBITDA by 5% and 7% respectively as we lower our Australian dollar assumptions by 10%. Our target price declined from S$3.05 to S$2.84 and we maintain our ACCUMULATE recommendation. Earnings growth continues to build up in India and Singapore. Weaker segments are sluggish earnings in Optus and NCS.

The Positive

+ Bharti is still the star performer. 3Q23 PAT for Bharti jumped 151% YoY to S$113mn despite the 7% currency headwind. Earnings growth was supported by mobile ARPU in India rising 18% YoY to Rs193 (S$3.10) and 4G subscriber growth of 11% to 216.7mn subscribers.  

The Negative

- Optus sluggish profits. Mobile subscribers were flat QoQ at 10.3mn despite some initial churn post the cyber attack. Nevertheless, EBITDA contracted 14% YoY to S$474mn from increased staff and investments in new businesses.

Outlook

The two growth drivers for Singtel remain Bharti and Singapore mobile. Optus and NCS profitability is still sluggish. Optus requires significant realignment of cost to improve on its persistently paltry returns of 0.8% ROE (annualised). NCS is in an investment phase in building up its IT headcount, especially in more competitive geographies.

• 1H23 results were within expectations. Revenue and EBITDA were 48%/46% of our FY23e estimates. A special dividend of 5 cents was announced following the S$2.2bn proceeds from sale of Bharti stake.
• Underlying earnings rose 2% to S$1bn supported by an 8% growth in associate earnings to S$813mn led by a turnaround in Bharti. There was a large drag in earnings from NCS with EBIT down 49% to S$53mn.
• We maintain our FY23e forecast largely intact. Our ACCUMULATE and SOTP TP of $3.05 is unchanged. Singtel is transitioning to longer-term growth drivers such as data centres and IT services. Near-term earnings growth will be driven by a rebound in mobile ARPUs in India, Singapore and other associates from roaming and improving economic conditions.

The Positives

+ Strength in Singapore consumer. Singapore consumer grew EBITDA 10% YoY to S328mn. Mobile enjoyed EBITDA expansion from a 12.6% YoY rise in ARPU as roaming revenue returned with borders re-opening. Roaming is around 60% of pre-pandemic levels. Penetration of roaming has risen as compared to using SIM cards of destination countries. Revenue was impacted by a 21% decline in pay TV to S$74mn due to the cessation of EPL.  

+ Turnaround in Bharti is still underway. Bharti earnings spiked more than 3-fold to S$172mn. Improvement in earnings came from the 24% YoY increase in ARPU to Rp190 (S$3.2) and 9% YoY rise in 4G mobile customers to 210.3mn.

The Negatives

- Still a work in progress for NCS. EBITDA for NCS declined 26% YoY to S$110mn. Part of the weakness was from post-acquisition charges in Australia such as staff retention and earnouts and overall higher staffing cost.

- Losses in GXS Digital bank. The digital bank associate registered a S$27mn loss in 1H23. Expectations are for break even in 2025 rather than 2027. From a banker to everyone strategy, GXS will pivot to selected segment. Loans will be targeted to mobile devices and niche small medium enterprises. The advantage of GXS is the lower customer acquisition cost by embedding GXS into Grab and Singtel apps plus tapping on both customer bases.

- Provisions in Optus. There were two provisions made on Optus – (i) goodwill impairment of S$1bn from higher WACC, lower Australian dollar and weaker economic outlook assumptions; (ii) A$140mn provision for the cyber attack based on independent review, credit monitoring services for impacted customers and replacement of customer documents. It does not include potential class action (no notification so far) and penalties from pending investigations.

• At the recent investor day, a key highlight was the recovery in mobile prices in Singapore, Australia, India and Indonesia from the benign competition and the return of roaming revenue.
• Business segments with softer outlooks include AIS and NCS. Softer AIS outlook is due to intense competition, and for NCS it is the near-term ramp-up in headcount and staff cost.
• Our ACCUMULATE and SOTP TP are maintained at $3.05. The group aims to raise ROIC from 5.4% to a high single digit in the mid-term, essentially doubling earnings. The tailwinds for the group include rising mobile prices and the disposal of loss-making subsidiaries.  Other drivers such as 5G monetization, cost optimisation and IT services, will be more elusive, in our opinion.

Key Highlights from Singtel Investor Day

1. Singapore consumer: Recovery in roaming and prepaid

   1. The return of foreign workers is supporting prepaid revenue. Healthy take-up of 5G prepaid as going online is important. Take-up of 5G also improves as handsets become more affordable. Competition is aggressive in prepaid despite the strict requirement of only three prepaid SIM cards per subscriber.
   2. Roaming revenue has returned to 46% of pre-pandemic level. Business travellers are staying longer and price plans need to adjust for longer roaming. Roaming can improve further as Korea, Japan and China have not fully opened.
   3. Broadband is experiencing upgrades to higher price plans.
   4. EPL is operationally challenging and there can be cost savings. Including OTT apps in mobile plans is not a new bundling plan and is less convenient. The focus is on non-EPL sports content and ethnic programmes.
   5. Rolling out 5G coverage indoors is challenging. And limited spectrum can impact the quality of the network to meet IMDA requirements. The increased spending on 5G has been a trigger for market consolidation in other countries.

    

    

   NCS: Still in the investment stage

   1. The largest systems integrator in SE Asia with more than 12,000 workforce. NCS's strength has been in public service, defence and homeland security.
   2. The target is S$5bn revenue in 5 years from the current S$2.4bn.
   3. Look to increase headcount from more cost-competitive countries such as India and Vietnam. The headcount could rise to 20,000 in less than 4 years.
   4. There is cost pressure from rising wages, increasing the workforce plus acquisition costs. The ability to raise the price and penetrate the new market will require time.

    

    

   Regional Data Centre: Doubling in capacity

   1. Current 60MW capacity (7 data centres) in Singapore generates S$250mn in revenue and 60% EBITDA. There is another 60GW underway. Tuas will commence with 30MW and another 30MW in the pipeline in Singapore. Thailand is expecting 20MW and Indonesia more than 100MW.
   2. The capital cost in the building data centres is around S$4.1mn per MW. Important factors in a datacentre include fault tolerance; telecommunications network; power lines; batteries and site selection.
   3. The largest operating expense is utilities (70% of total). Around 2/3 of the data centres have pass-throughs from higher utilities. The balance will be renegotiated when contracts are due. Between 30-40% of the power is consumed by cooling.
   4. Announced capacity by competition can be only landbank and no connectivity and power. In the joint venture with Gulf Energy and AIS, land has been secured to develop 20MW. Gulf Energy has capabilities in renewable energy; AIS the telecommunications reach and Singtel the relationship with hyperscalers.
   5. An important metric for the datacentre is power usage effectiveness (PUE). The power used to operate the servers and other equipment. The best practice is 1.4, with hyperscalers drive to 1.3. The newer datacentres being built will have much more hyperscalers.

Optus: Raising prices and capex to peak this year

1. Enjoys a 33% market share in mobile. Competition is fierce with 40 MVNOs that compete on price. Pricing has been softer recently due to the ceasing of insurance plans (A$1.20) and fewer late payment fees. In July 2022, postpaid prices increased from A$55 (80GB) in May 2021 to A$59 (100GB).
2. Roaming is 40-45% of pre-pandemic levels but Chinese tourists and foreign students are still missing. Outbound roaming is larger than inbound but roaming revenue is not as large as in Singapore.
3. The Telstra-TPG network merger is not competitive. Telstra gets access to TPG spectrum and TPG gets access to Telstra's network. It is a backdoor for Telstra to secure more spectrum when there is a cap in the auctioning process.
4. Capex will be elevated this year to 18-20% of revenue due to 5G, one-off satellite Capex; new exchange and replacement of Huawei equipment.
5. Hard to achieve comparable ROIC similar to the group as a result of the huge A$10bn capital in the business.

• 1Q23 results were within expectations. 1Q23 revenue and EBITDA were 24%/24% of our FY23e estimates. We removed Amobee from our forecast. It has been classified as a subsidiary for sale. There was a 4% headwind from Optus due to weaker AUD.
• 1Q23 underlying EBITDA expanded 3% YoY (or up 5% in constant currency) to S$977mn, excluding NBN migration revenue and Amobee. Regional associates' earnings rose 12% YoY to S$411mn. The 6% depreciation in the Thai Baht and Philippine Peso also impacted earnings.
• Our FY23e PATMI is raised 5% to S$2.15bn to account for the S$129mn exceptional gain from dilution of stake in Australia Tower Network and share of Airtel revaluation of foreign currency convertible bonds. Revenue and EBITDA forecasts were modestly impacted by the removal of Amobee. Our ACCUMULATE and SOTP TP are maintained at $3.05.  Singtel has also announced a 3.3% stake in Bharti Airtel worth S$2.25bn to Bharti Telecom. The gain on sale for Singtel is S$0.6bn. We view the disposal positively. It reflects the ability to realise gains from its portfolio of associates trading at a holding company discount and an opportunity for special dividends.

The Positive

+ EBITDA recovery in Singapore and Australia. Singapore consumer enjoyed a strong 11% YoY recovery in 1Q23 EBITDA. We believe roaming revenue supported an 11% YoY (and QoQ) rise in blended ARPU. Earnings drag came from TV revenue, a decline of 14% YoY. Australia enjoyed a 6% YoY improvement in EBITDA excluding NBN. We believe the reopening of borders and relaxation of movement restrictions supported mobile revenue growth.

The Negative

- Still an investment phase for NCS. Despite a healthy 13% YoY rise in revenue in 1Q23, NCS EBIT dropped 24.6% YoY. NCS is investing in higher headcount and higher staff costs which is significantly diluting margins. Group enterprise fared better with EBIT flat on a YoY basis. The pick-up in roaming, data centre and cybersecurity revenue is offset by the structural decline in voice revenue.

• FY22 revenue met our expectations at 101% of FY22e estimates. EBITDA was 93% of estimates due to lower-than-expected NBN migration earnings.
• 2H22 EBITDA was down 5% YoY, the largest drag from NCS and widening losses in Trustwave. Underlying PAT in 2H22 was up 15% excluding exceptional items, NBN and job support scheme.
• We lower our FY23e forecast by a modest 2% to account for weaker enterprise earnings. Our SOTP TP is raised from S$2.86 to $3.05 as we roll over our EV/EBITDA into FY23e and higher associate market valuations. Earnings in FY23e are expected to recover as roaming revenue creeps up and economic conditions improve in emerging countries post lock-down. The targeted monetization of around S$3bn assets will help narrow the valuation discounts for associates, strengthen the balance sheet and improve the capacity to raise dividends. Some of the assets identified for recycling of capital include disposal of Amobee, redevelopment of Comcentre and possibly part disposal of associate stakes. We maintain our ACCUMULATE recommendation.

The Positives

+ Improving earnings in Australia. Mobile service revenue rose 4% YoY to A$1.84bn, supported by both ARPU and subscriber growth. Optus mobile plans are gaining traction with customers for their more differentiated offering in terms of 5G speed, on-demand product features and improvement in customer service levels. Total consumer revenue in Australia declined due to a drop in NBN migration revenue (-83% YoY) and slower equipment sales (-25% YoY).

+ Huge reversal in Bharti earnings. The growth in earnings was driven by a 23% rise in  ARPU and a 12% increase in 4G subscribers in India. Airtel Africa also delivered a 24% improvement in EBITDA through subscribers (+9%) and ARPU growth (+11%).  

The Negative

- Sluggish enterprise and NCS earnings. EBITDA fell 4%, dragged down by a 14% drop in fixed voice revenue and 3% fall in leased circuits and broadband. Excluding JSS, NCS recorded a 4% rise in EBITDA. Margins were softer due to a 19% YoY rise in staff costs.

Outlook

Key drivers to earnings recovery in FY23e are 1) Roaming revenue in Singapore consumer and enterprise; 2) Organic and inorganic growth in NCS; 3) Economic recovery post-lockdown in emerging markets of Thailand, Philippines and Indonesia; 4) Improving ARPU in India and rising data traffic.