Citi Research has examined the differentials in labour count and labour cost (in)efficiencies across the Asean telcos, adjusting for contract staff outsourcing where possible.
In its report dated Apr 15, analysts Arthur Pineda and Luis Hilado say: “Instead of looking at the glass half empty for companies with unfavourable labour cost structures, we see them as potential sources of future efficiencies which could lead to potential earnings upside over the long run, provided that there be sufficient will and initiatives in place to address these gaps.”
From market preference over the next six to 12 months, the analysts prefer Indonesia, Thailand, Singapore, Philippines and Malaysia, in descending order.
With that, Citi has “buy” calls on Indonesia’s PT Telkom; Singapore’s Singapore Telecommunications Z74 (Singtel) and StarHub CC3 ; Philippine Long Distance Telephone Company (PLTD) from Philippines; as well as True and AIS from Thailand. The analysts believe that these telcos also appear to have room for cost improvements.
In Indonesia, Telkom is viewed as the least efficient but is poised to improve. From a labour standpoint, Telkom stands out as being the least efficient Indonesian telco with about 8 million subs/employee (compared to 22 million to 24 million for peers) and about US$0.5 million ($0.68 million) revenue generated per employee, compared to about US$0.8 million for peers.
Staff & professional services as a percentage of revenues also lie at nearly 1.4x that of its next competitor, Indosat. While Telkom is inefficient on Citi’s labour metrics, its recent moves toward consolidating broadband with mobile entities is a step forward toward the right direction with target annual long-term cost synergies of about 2 trillion rupiah ($169.3 million) with nearly half of these gains driven by general and administrative (G&A) efficiencies wherein labour is a major component. “This should help drive margins, which had been a key point of investor concern following its 4QFY2023 cost disappointments,” say the analysts.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents.
Meanwhile, both True & AIS have room to cut costs too. True ranks weaker on efficiency metrics with annualised revenue/employee of about 13% lower than AIS (with revenues adjusted and annualised for both to reflect M&A effects).
Exercises however are in place to address this with True noting it had reduced staff & contractor count total count from 18k,000 at the start of its merger in 1Q2023 to about 14,000 by end-2023. Further room for rationalisation remains given an estimated 14% headcount premium to AIS. “Benefits of cost rationalisation and margin improvement however will likely also extend to AIS as well with its own cost base bloated by its acquisition of 3BB broadband business in Nov 2023,” say Hilado and Pineda.
In Philippines, Globe & PLDT are seen to possess similar cost levels on with labour-related charges averaging at 17% of revenues over the last three years. While there may be material differences in absolute headcount, this may be owing to differences in in-house versus outsourced labour. Total labour & professional costs however remain as relative outliers compared to Asean emerging market peers’ 8% of revenues on average. This indicates scope for further cost rationalisation to better narrow the gap versus regional peers. There is an active and ongoing strategy to address this with PLDT/Globe reducing headcount by 17%/9% over the last three years.
See also: Suntec REIT biggest beneficiary from MAS’s ‘looser’ leverage, ICR rules: OCBC
For Singapore’s Singtel and StarHub, the analysts also sees room to trim. StarHub holds 1.8 million subs/employees, which is low compared to the 3 million to 24 million for Asean peers even as it commands the highest rev/emp of about US$1.2 million. Labour-linked fees also appear disproportionately high at around 14-16% of total revenues, which is higher compared to the about 8% average for Asean. Costs however should decline given its business transformation and digitalisation programme that concludes by FY2025.
Singtel faces the same challenge with a relatively high labour base of about 13,100 (6,900 for Optus and 6,200 for SG businesses). However, Singtel recently started an optimisation programme to cut $0.6 billion within 2.5 years.
