DBS Group Research analyst Sachin Mittal is keeping his “buy” call on Singapore Telecommunications (Singtel) on the potential sale of Amobee and Trustwave as it could mean an upward earnings revision after a long time.
Mittal has also upped his target price to $3.24 from $3.20 previously.
“Our fair value for the company’s core business is 81 cents per share (previously 77 cents), from higher core profit due to the potential sale of Amobee and Trustwave,” he writes.
“We value regional associates at $2.43 per share (unchanged), using 15% HoldCo discount to reflect a gradual recovery in the core business,” he adds.
On June 20, Singtel was reported to have been in talks with UK-listed advertising technology company, Tremor International, to sell its subsidiary Amobee for £165 million ($280.4 million).
Amobee, a US-based advertising technology unit, has been largely loss-making; the Singtel subsidiary had posted a $70 million EBIT loss in the FY2022, notes Mittal in his July 19 report.
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Singtel is also exploring the potential sale of another subsidiary, Trustwave, which it acquired for $770 million in 2015.
Trustwave generated an estimated EBIT loss of $140 million in the FY2022, adds Mittal.
“Overall, [the sale] could result in avoiding an estimated $200 million to $210 million annual operating loss ([around] 9% of FY23F underlying profit) from Amobee and Trustwave although the savings would be slightly lower in FY2023 due to the timing of Trustwave classification,” the analyst writes.
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On this, Mittal has raised his earnings estimates for the FY2023 and FY2024 by 5% and 4% respectively based on the potential sale of the subsidiaries.
“As Amobee is in advance stage of sale, Amobee might be classified as a subsidiary that is ‘held for sale’ from 1QFY2023 onwards; therefore, its revenue and earnings will not be captured from FY2023 onwards in Singtel’s reported profit,” he says.
“We also expect Trustwave to be divested in FY2023 as Singtel has mentioned about its potential sale a few times and it could be classified as ‘held for sale’ in 2QFY2023 or 3QFY2023 in our view,” he adds.
Despite the raised earnings estimates, Mittal notes that his figures still stand 6% and 10% below the estimates of his peers for the FY2023 and FY2024 respectively.
“The difference is mainly due to slower recovery estimates in Singapore and Australia, as roaming revenue may not recover fully due to ingrained habits, while SIM-only plans may also eat into the postpaid revenue pool,” he says.
Upwards earnings revision by Optus
Mittal is also positive on Singtel’s prospects after its Australian subsidiary, Optus, had raised the price of Optus-choice plans by A$4 ($3.81) for existing subscribers in early July.
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The upward revision translates to around 10% to 15% on an average ARPU (or average revenue per unit) of A$31.
Optus’ competitor Telstra had raised the mobile tariffs by A$4 across all its plans in the beginning of July.
“The last tariff increase by Optus in May 2021 was not applicable to existing subscribers who had joined before May 2021,” notes Mittal. “This July upward revision will be applicable to subscribers who joined before May 2021 which will further boost ARPU growth.”
Gradual recovery following resumption of foreign travel
After a tumultuous period during the Covid-19-induced lockdowns, Singtel’s core business segments in Singapore and Australia are gradually recovering after the resumption of foreign travel, says Mittal.
Singtel should be less reliant on the Singapore economy compared to local banks in Singapore who offer similar growth, says the analyst.
“Furthermore, increasing contribution from associates will further support the telco’s earnings growth, making the company an exciting stock that offers a better mixture of growth and yield,” he adds.
The current discount to Singapore’s 36% holding company (HoldCo) has widened to 36% compared to its seven-year average of 24%, the analyst notes. The wider discount is mainly due to a sharp 42% decline in core operating profit from Singapore & Australia in FY2021.
With that, he has projected core operating profits to recover by another 27% in the FY2023 after a 33% recovery in the FY2022 excluding one-offs.
At its current prices, Singtel offers a yield of over 4.0% based on a 75% payout ratio. Among regional telcos, Singtel offers “far superior growth” than other telcos that pay dividends, the analyst continues.
What could drive Singtel to achieve its bull case TP of $4?
In his report, Mittal has given Singtel a base target price of $3.23 and a target price of $4 in a bull case.
The base scenario assumes a slower recovery in roaming revenue, which used to account for 15% to 20% of the Singapore consumer business revenue before Covid.
“A rapid recovery in this segment and support from 5G mobile upgrades could signal a healthy recovery in the overall consumer business,” says Mittal.
Optus is also continuing to recover with FY2023 revenue expected to improve, thanks to its rising APRU.
“Historically poor core business performances have impacted Singtel’s share price, affecting its earnings. Its ability to pay out healthy dividends also followed suit. Singtel is continuing to unlock the value of its assets to support organic growth while distributing some portions as dividends,” the analyst writes.
The bull case, on the other hand, assumes higher contribution from subsidiaries Bharti Airtel and Telkomsel to Singtel’s overall pre-tax associate earnings.
“Overall, associate pre-tax earnings see a positive correlation of 25% to Singtel's share price from 1QFY2018 onwards. Bharti Airtel and Telkomsel are expected to contribute over 67%/70% to pre-tax associate earnings in FY2023/FY2024 (63% in FY2022),” the analyst says.
“The tariff revision by Bharti Airtel and industry stability in the Indonesian telecom sector are expected to bode well for Singtel's forecasted associated earnings,” he adds.
To this end, Mittal has estimated Bharti Airtel’s contribution for the FY2023 to be at $691 million and $933 million for the FY2024. The figures will be led by rising APRUs on the back of the recent hikes in tariffs, he writes.
“Bharti Airtel has begun its earnings expansion and might contemplate implementing further tariff hikes, which can bode well for Singtel. Bharti Airtel’s Triple Play Plan is gaining traction in India. Bharti Airtel is also witnessing healthy subscriber additions,” he says.
“All these factors are expected to support the rise in ARPU, which can possibly lead to a much higher pre-tax earnings contribution to Singtel from FY2023 onwards,” he adds.
According to Mittal’s projections, Telkomsel is expected to generate $915 million each in both the FY2023 and FY2024 in his base case scenario.
To the analyst, competition in Indonesia has “largely stabilised” with Telkomsel now only facing stiff competition from XL Axiata at present. Indosat Ooredoo Hutchison is occupied with its integration challenges following the merger, he notes.
“If XL Axiata fails or falls below expectations on achieving the ex-Java region market share, it will be a positive for Telkomsel, which continues to demonstrate strong network quality. Furthermore, Indonesia telcos have undertaken upward price revisions, which could potentially lead to an uplift in ARPU and an improvement in data yields,” he writes.
Singtel’s Thai subsidiary, Advanced Info Service (AIS), could also benefit from a potential industry consolidation resulting in improved ARPU, says Mittal.
“AIS is also well equipped with free cash flows to pay dividends and reduce its debt burden. In addition, AIS is seeking growth in its fixed broadband segment. To achieve the projected bull case pre-tax earnings contribution, the above needs to materialise for the three telcos, Bharti Airtel, Telkomsel, and AIS,” he writes.
UOB Kay Hian sees Singtel ‘on stronger footing’
UOB Kay Hian analyst Chong Lee Len has kept her “buy” call on Singtel with an unchanged target price of $2.90.
“At our target price, the stock will trade at 13x FY2023 EV/EBITDA (its five-year mean EV/EBITDA),” she writes.
In her report dated July 18, the analyst notes Singtel’s strategic reset, where its management aims to monetise its 5G investments in Singapore and Australia. The group’s management also intends to unlock the value of its inherent assets and recycle the capital into growth levers.
The way Chong sees it, this will drive a post-Covid-19 three-year earnings compound annual growth rate (CAGR) of 15%.
“This will pave the way for Singtel to narrow its holding company discount as the company actively reallocates capital to drive core business growth and general sustainable cashflow to enhance shareholder’s value. We project a three-year earnings CAGR (FY2022-FY2025) of 15% vs -12% during the Covid-19 period (FY2019-2022),” she writes.
Like Mittal, Chong also sees the divestment of Amobee within the next 12 months as a plus for the telco’s FY2023 earnings.
The earnings for the FY2023 will also benefit from the absence of losses from the subsidiary.
Chong, too, expects an announcement regarding Trustwave in 2HFY2022.
“To recap, both assets have been de-emphasized following the write-down in December 2021 (amounting to $1 billion of impairment),” she says.
For the FY2023, Chong is also anticipating Optus to report a positive mobile service revenue and EBITDA margin expansion on the back of the potential price hike in Australia.
Data centre partnership
Further to her report, the analyst believes FY2023 should see a more detailed announcement on Singtel’s data centre partnership in Thailand and Indonesia.
“Singtel may identify suitable sites to develop data centres in Thailand. Gulf Energy will provide the energy while Singtel will step in with operational expertise. AIS will complete the offer with connectivity services,” she writes.
“Telkomsel and Singtel plan to form a joint venture (JV) company to develop data centre catering to the regional market. The JV can either acquire existing data centres or develop greenfield projects for data centre facilities. If the project is located in Indonesia, Telkomsel will own a higher stake, and if the project is in Singapore, Singtel will be the majority shareholder,” she adds.
Singtel currently has seven data centres in Singapore with a capacity of 70 megawatts (MW). Its goal is to add another 100 MW of capacity to its data centre portfolio over the next three to five years, notes the analyts.
“This will create a data centre asset close to $7 billion to $8 billion within five years. Singtel recently announced that they are building a 30MW integrated cable landing station and data centre in Singapore with funding being currently worked out with potential investors,” she writes.
Key re-rating catalysts in Chong’s view, are the successful monetisation of 5G, the monetisation of data centres and, or NCS, which is Singtel’s technology services arm, as well as the market repair in Singapore and resumption of regional roaming revenue.
As at 2.09pm, shares in Singtel are trading 2 cents lower or 0.75% down at $2.64.
