• 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.

• 9M22 revenue/EBITDA met expectations at 76%/72% of our FY22e estimates. Underlying PAT of S$473mn was flat YoY.
• Mobile earnings expanded in Singapore, Australia and India. The Philippines was the key drag. Rising ARPU and cost controls were the key drivers of earnings growth.
• Enterprise earning was sluggish from legacy services and lower project wins.
• We kept our FY22e forecast largely unchanged before incorporating S$261mn net gain from disposal of Australia Tower Network. As roaming revenue returns, economic conditions improve and competition is more benign, we expect mobile to enjoy earnings growth in FY22e and FY23e. We maintain our ACCUMULATE recommendation and SOTP TP of S$2.86.

The Positive

+ Improving mobile ARPU and earnings. Blended ARPU for mobile is recovering in Singapore (+4.3% YoY), Australia (+4.8%) and India (+12%). ARPUs are rising on the back of more benign competition, improving roaming revenue, higher priced data plans and the 5G roll-out. Mobile earnings rose from operating leverage and better cost controls.

The Negative

- Lacklustre enterprise. Despite the growth engines of cloud and cybersecurity, enterprise revenue is bogged down by legacy telco services and higher headcount expenses. The lack of new projects was another source of weakness.

Outlook

A general recovery in emerging market economies is a tailwind for Singtel’s associate earnings. Demand for mobile services in these countries is more a discretionary spend with a higher propensity to rise as income levels improve. Australia and Singapore will ride on the rebound in roaming and incremental uplift in ARPU from 5G.

Maintain ACCUMULATE with an unchanged TP of S$2.86

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

• 1H22 EBITDA / PATMI met our expectations at 48%/47% of FY22e estimates.
• Australia consumer EBITDA rebounded 28% YoY in 1H22 to A$918mn (excl. NBN). Mobile service revenue expanded almost 10% to A$1.84bn, supported by a 12% rise in ARPU.
• Interim dividend was cut for the 2^nd consecutive year to 4.5 cents (1H21: 5.1 cents, 1H20: 6.8 cents). Dividend guidance is 60%-80% payout of underlying net profit.
• Our FY22e forecast is unchanged. Operationally, we expect earnings to further expand in 2H22. Associate earnings will recover as lockdowns ease and economic conditions improve. Border re-openings will also support Singapore and Australia consumer divisions. We maintain our ACCUMULATE recommendation. Our SOTP TP is raised to S$2.86 from S$2.52 with higher associate market valuations.

The Positives

+ Resurgent Australia mobile. Mobile service revenue expanded almost 10% to A$1.84bn.  Blended ARPU increased 12.6% to A$32, close to pre-pandemic levels. Optus 5G plans have been capturing market share in SME and consumer segments.

+ Bharti turnaround is intact. Despite the pandemic, Bharti Airtel (BHARTI IN, Not Rated) enjoyed a major S$138mn YoY turnaround in 1H22 net profit. Earnings growth is driven by a 10% increase in subscribers and a 7% YoY rise in ARPU. Following the rights issue in October, Singtel’s stake in Bharti nudged up from 31.72% to 31.76%.

The Negative

- Cut in interim dividends. Despite improving earnings, the interim dividend was cut for the 2^nd year to 4.5 cents. 1H22 free cash flow at S$1.7bn was similar to last year. When compared to 1H19, there is a shortfall of S$200mn due to higher capital expenditure needs for 5G. Our FY22e DPS is 9 cents (or 70% payout).

Outlook

Earnings should recover further in 2H22. More economic sensitive associate earnings will rebound as lockdowns ease and economic conditions improve. Singapore and Australia mobile will enjoy a lift in revenues as borders re-open. Improvement will be from higher roaming revenue and equipment and re-contracting sales as shops re-open. We are neutral on the disposal of infrastructure assets. It appears more a refinancing exercise unless cost savings or new revenue opportunities are achieved through the disposal.

In terms of FY22 guidance, Singtel reaffirmed capital expenditure of around S$2.4bn (FY21: S$2.2bn), dividends from associates of at least S$1.3bn (FY21: S$1.3bn) and dividend payout of between 60% and 80% of underlying net profit (FY21: 71%).

Maintain ACCUMULATE with a higher TP of S$2.86, from S$2.52

Our SOTP valuation is based on 6x EV/EBITDA for Singtel’s core Singapore and Australia businesses, at S$0.77/share. Associates are marked to market at S$2.09/share with a 20% discount to reflect volatility in their share prices.

• 3Q21 revenue and EBITDA met expectation, with 9M21 numbers at 78%/70% of our FY21e forecasts. EBITDA declined 14% YoY to S$1bn. Singapore consumers were its weakest link, with mobile ARPU down 23%
• After-tax exceptional gains were S$116mn, from Bharti Infratel’s merger (S$72mn) (BHARTI IN, Not Rated) and Telkomsel’s sale of towers (S$60mn).
• Australia still grappling with high costs. 3Q21 EBIT declined 29% YoY to S$36mn, excluding NBN. This was despite A$ appreciation of 5.7%.
• Maintain NEUTRAL and SOTP TP of S$2.44. Underlying weakness in Singapore consumer from loss of roaming revenue and cost burden in Australian could persist. However, there were some bright spots, including stable mobile revenue in Australia, resilient enterprise operations and Bharti’s continued turnaround.

The Positives

+ Enterprise earnings resilient. EBITDA at group enterprise was flat YoY. This was commendable, given macro weakness. Demand was driven by system infrastructure services, cloud and maintenance projects led by NCS and Australia Enterprise. NCS bookings in 3Q21 were S$809mn from public service, financial and commercial. 1H21 bookings for the whole enterprise division had only totalled S$755mn.

+ Australia consumer stable. Revenue from Australia consumers was up 5.4% YoY to S$4.16bn, ex-NBN. Singtel’s strength in Australia came from mobile revenue, which was flat YoY at A$1.5bn. Despite a 5% YoY fall in mobile subscribers, blended ARPU managed to creep up 3% to A$30. A 41% YoY surge in data usage to 17GB per month likely helped.

+ Turnaround at Bharti continued. Net loss at Bharti shrank 95% YoY to S$4mn. Higher mobile ARPUs and strong 4G additions were behind this.

The Negatives

- Singapore consumer still contracting. Roaming revenue from the Singapore consumer continued to recede. Revenue contracted 11% YoY while postpaid ARPU collapsed 26% YoY. EBITDA was down 22% YoY. Excluding S$13mn from the Job Support Scheme, EBITDA contracted 28% YoY to S$141mn.

- High fixed costs in Australia. Australia’s 3Q21 EBIT was down 29% YoY to S$36mn, excluding NBN. We believe high fixed costs from its on-net broadband business continued to weigh on it. EBITDA fared better with an increase of 4.4%, excluding NBN.

Outlook

Singtel remains in the grip of roaming losses, high costs in Australia and competition in Indonesian mobile. That said, it had some bright spots in 3Q21, such as its enterprise resilience, mobile revenue stability in Australia and Bharti’s recovery.

Maintain NEUTRAL with unchanged TP of S$2.44

We keep our target price and FY21e earnings largely unchanged. We continue to value Singtel’s core Singapore and Australia businesses at 6x EV/EBITDA and mark its associates to market with a 20% discount to account for their share-price variability.

# Note – Management does not provide analysts’ briefings for quarterly business updates.

• 1H21 ex-exceptional results within expectations, 1H21 EBITDA at 45% of our FY21e forecast.
• Two major exceptionals were dilution gain on Airtel of S$550mn and Airtel’s exceptional losses of S$912mn from additional licence fees and spectrum charges.
• Optus’ EBITDA fell 30% YoY to A$977mn due to loss of on-net broadband subscribers and weaker equipment sales.
• Interim dividend cut by 25% to 5.1 cents (1H20: 6.8 cents).
• Only FY21 guidance was dividends from associates will be S$1.3bn (FY20: S$1.3bn). Maintain NEUTRAL and SOTP TP of S$2.44. Operationally, the worst appears over as EBITDA is improving QoQ. The two pain points remain declining roaming revenue as borders shut and loss of high-margin broadband business in Australia to NBN.

The Positive

+ QoQ improvement in EBITDA. Group EBITDA rose 12% QoQ to S$1bn as revenue recovered in all key businesses. Mobile ARPU in Singapore stabilised QoQ at S$23. In Australia, ARPU expanded a modest 3% to A$29. A recovery in enterprise was led by managed services and cybersecurity.

The Negatives

- Cut in dividends.  Singtel cut its interim dividend by 25% to 5.1 cents and has adopted scrip dividends. Uncertainties over the pandemic and a commitment to keep investment-grade ratings were among the reasons given. Full-year dividends will not exceed underlying profits. Our full-year underlying EPS is 13 cents.

- Optus a source of weakness. EBITDA in Australia was down 29% YoY to A$977mn. Revenue fell  9% YoY as mobile equipment sales declined 25% YoY and on-net broadband, 53% YoY. Despite lower revenue, fixed costs such as selling, administrative and staff costs rose a combined 7% to A$920mn. Optus remained burdened by running two broadband networks and headcount as it manages the migration of customers from its network to the government’s National Broadband Network (NBN).

Outlook

Likely bottomed. We are encouraged by the gradual recovery in its operations and believe a bottom has formed. For steeper and more sustainable improvements in earnings, roaming revenue would need to return to its mobile business as international travel resumes. Secondly, Optus has to remove the cost of running its on-net broadband business and any other NBN transition expenses.

5G requires more value add. The company reiterated that the cost of delivering data to customers will be lower.  Telcos need to build services and other applications beyond faster 5G speeds and larger data capacity to raise ARPUs, because excess capacity in 5G can be built up by the industry and erode the price premium from improved connectivity.

Maintain NEUTRAL and SOTP TP of S$2.44

Our FY21e EBITDA has been lowered by 1% while FY22e has been raised by 6% as we assume recovery in travel and NBN migration cost tapers down. We continue to value Singtel on sum of the parts, applying 6x EV/EBITDA to its core Singapore and Australia operations, in line with regional peers, and valuing associates at market valuations with a 20% discount to account for variability in share prices.