Analysts are overall positive on local telco player Singapore Telecommunications Z74 (Singtel) following its latest 3QFY2024 ended December 2023 results.
During the third quarter period, net profit was $465 million, 12.5% lower y-o-y due to a higher exceptional loss mainly from Optus and Airtel. Underlying net profit, however, stood stable at $559 million for the quarter as the growth in NCS and Optus offset Singtel Singapore’s weaker performance.
Meanwhile, Singtel’s net profit for the 9MFY2024 grew by 52.9% y-o-y to $2.60 billion while underlying net profit rose by 7.4% y-o-y to $1.22 billion.
See more: Singtel reports 3QFY2024 net profit of $465 mil, 12.5% lower y-o-y
The way DBS Group Research sees it, the 3QFY2024 underlying earnings was 6%-7% below estimates, on sharp drop in Airtel Africa and Telkomsel weakness. However, core operating profit was in line, led by NCS, Digital Infraco, and an absence of Trustwave losses.
DBS analyst Sachin Mittal has hence lowered FY2024/FY2025 earnings by 9% each on weakness in associates, bringing the research house’s estimates about 8% and 15% below consensus.
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With that, the analyst has kept his “buy” recommendation on Singtel with a lower target price of $3.27 from $3.39, with a 37% upside potential.
Mittal likes the stock for its geographical diversification. Singtel is the top integrated player in Singapore and owned the No.2 mobile plater in Australia. It also holds significant stakes in its various telecom associates in India, Indonesia, Philippines and Thailand, which contribute over 67% of the group’s operating profit in FY2023.
Currently, the holding company (HoldCo) discount has expanded from less than 15% in FY18 to 48%, as the share does not reflect the rise in the market value of its associates.
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This is due to Singtel’s return on invested capital (ROIC) falling below its weighted average cost of capital (WACC) due to a sharp decline in core operating profit over the last five years.
“We expect the HoldCo discount to narrow to 20%, with a recovery in core operating profit led by annual cost-savings of $200 million over FY2023-FY2026 and growth in its NCS and data-centre business, and a divestment target of $6 billion over FY2023-FY2026 including associates,” says Mittal, who expects this to uplift ROIC and support an approximately 90% payout ratio over the next three years.
For Maybank Securities, it has kept its “buy” call and $3.10 target price in its Feb 23 report.
While the 3QFY2023 numbers may have missed consensus, the research team sees some bright spots. “While the headline delivery was soft, we see Optus resiliency (despite network outage), NCS margin improvement and firm associate operating momentum as bright spots,” says the research team.
Nonetheless, the research team remains cautious of 3QFY2024 numbers missing consensus estimates, continued softness in the Singapore market, a mixed bag of sentiments from the group’s associates and partial foreign exchange weakness.
Except for Telkomsel mobile softness, associates posted firm topline growth although pre-tax contribution was impacted by M&A linked factors and foreign exchange.
Meanwhile, PhillipCapital is reiterating its “buy” call on Singtel with an unchanged target price of $2.80.
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“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 FY2024 Patmi is reduced by 3%. We expect an upside surprise in Ebitda margins in 4QFY2024 if Singtel can deliver its $200 million of cost out by the end of FY2024,” says analyst Paul Chew.
While the mobile price repair is underway in multiple countries where Singtel operates, Chew expects this to drive earnings together with Singtel’s plans to monetise $4 billion of assets further.
Chew notices an early mobile price repair in Australia. Optus postpaid average revenue per user (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,” says Chew, while noting that despite the network outage, mobile service revenue grew 3.4% y-o-y.
However, Airtel Africa took a currency hit. Overall, Bharti Airtel’s contribution declined by 23% y-o-y to $87 million. While operations in India grew with higher ARPU, currency took a toll on the results as the Indian rupee declined against the Singapore dollar. dollar. A translation loss also hit Africa operations due to the weakness in the Nigerian Naira.
“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 $600 million reduction in core cost, largely in Optus,” says Chew.
RHB Bank Singapore has similar sentiments as it points out the weaker showing from associates and foreign exchange weakness. It has nonetheless kept its “buy” recommendation, while lowering target price to $3.15 from $3.20 previously.
The research team at RHB share similar concerns with consensus on Singtel, such as the group’s core Patmi for 3QFY2024 falling short, foreign exchange weakness leading to declining associate contributions, weak spots in Singapore and pressured margins from Digital InfraCo. Similarly, some bright spots that RHB has highlighted include the strong growth from NCS and opex cutting efforts.
As at 11.00am, shares in Singtel are trading at $2.32.
