Analysts have all kept their positive recommendations on Singapore Telecommunications (Singtel) despite the telco’s earnings for the 3QFY2022 missed expectations, or stood broadly in line with their full-year estimates.
CGS-CIMB Research analysts Foong Choong Chen and Sherman Lam have kept “add” on Singtel even though Singtel’s 3QFY2022 net profit missed expectations due to associate earnings.
The analysts have, however, given Singtel a higher target price of $3.30 from $2.90, which was due to higher fair values for associates, led by Bharti.
To be sure, Singtel’s associate profits for the 3QFY2022 climbed 12.9% y-o-y thanks to a turnaround in Bharti’s contribution to $45 million on higher subscriptions, average revenue per user (ARPU) and EBITDA margin. The higher associate profits during the quarter was offset by weaker performances from AIS, Globe and Telkomsel.
Globe and Telkomsel also led to associate earnings waning 6.2% q-o-q, which was partly cushioned by Bharti and AIS.
To this end, Foong and Lam have cut their core earnings per share (EPS) estimates for the FY2022 to FY2024 by 5% to 6%, mainly after factoring lower earnings in Singapore on the back of lower device sales and slower post-Covid-19 roaming recovery.
“We now see core EPS rebounding 13% y-o-y in FY2022, then rising 30% and 17% y-o-y in FY2023 and FY2024 respectively, driven by higher associate earnings (led by Bharti) due to easing competition, roaming revenue recovery, and higher Optus earnings (more rational competition, cost savings),” write the CGS-CIMB analysts.
Singtel’s re-rating catalysts include core EPS recovery for the FY2022 to FY2023, a further monetisation of its assets and expansion into higher growth business areas such as regional data centres and digital banking.
Meanwhile, price wars would prove a key downside risk to the counter.
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Singtel’s share price of $2.57 as at the analysts’ report on Feb 16 implies FY2022 EV/EBITDA of just 2.5 times for Singtel 5G and Optus.
Citi Research analyst Arthur Pineda is keeping “buy” on Singtel with a target price of $3.56.
“Our sum-of-the-parts (SOTP) valuation for SingTel leads to a fair value of $4.05. After applying a 10% holding-company discount, we derive a $3.56 target price,” writes Pineda in his Feb 15 report.
To him, Singtel’s 9MFY2022 results fell short of his expectations, with its earnings running at 62% of his full-year estimates.
“Softness in the digital and ICT segments were compounded by challenges across the regional associates which saw a sequential decline into 3QFY2022,” he says.
“Operating metrics for Singapore & Australia Consumer segments however are trending more positively into 3Q with q-o-q revenue and EBITDA expansion and we expect this to sustain into 4Q with further market re-openings. Associates which drove the q-o-q softness also faces potential improvements into 2022 with mergers and acquisitions (M&A) and price improvement factors in play Thailand, Indonesia and India,” he adds.
Looking ahead, Pineda sees positive key operating trends for Singtel in Singapore and Australia, even though this has been neglected by softer trends in the Asean market.
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“We do however see likely tailwinds into the associates into 4Q22 with AIS guiding for material revenue growth expansion (even excluding the benefit of potential M&A) and Indonesia now consolidating into 4 operators with Indosat & Hutch finally merging in January 2022,” he writes.
“India’s price increases should take further hold into the following quarter allowing for even better profit momentum. Even Singapore & Australia momentum should sustain given market re-openings and new plan migrations. We thus see room for the street to gloss over the near-term profit miss given favourable trends ahead,” he adds.
Maybank Securities analyst Kelvin Tan sees Singtel as being “on the verge of recovery”. The telco’s core PATMI of $1.69 billion for the 3QFY2022 stood “broadly in line” with that of consensus’ estimates and slightly behind Maybank’s own estimates.
He has kept “buy” on the counter with a higher target price of $2.98 from $2.83 previously after inputting a higher valuation on its regional associates. His forecasts for Singtel’s earnings remain unchanged.
In his report on Feb 16, Tan says Singtel’s operational revenue should improve further as its associates earnings recover from lockdowns. Stabilising economic conditions should also drive the telco’s operational revenue upwards, he adds.
“Easing border restrictions should support the Singapore and Australia consumer divisions. Besides extending 5G leadership, the group is focusing on building new businesses across Asia underpinning investment in digital banking in Indonesia and collaborating with regional partners to develop their data centre expertise,” he writes.
“We continue to see strong growth in data centre services as enterprises accelerate digital transformation. Singtel’s strategic investments should help to recycle capital and crystallise value from existing assets, allowing it to build future growth drivers, in our view,” he adds.
Tan, who continues to view Singtel as his top pick amongst the telco sector, forecasts EBITDA to grow at a 5.9% compound annual growth rate (CAGR) over FY2021 to FY2023 due to earnings recovery following Covid-19.
“We expect net debt to EBITDA, including associate dividends, to remain healthy at 1.6 times to 2.2 times in FY2021-FY2023; providing support to its fixed DPS (distribution per share) commitment,” says Tan.
According to him, swing factors in Singtel’s favour include a strong growth in enterprise and Digital Life to positive operating leverage; stronger–than-expected ARPU due to easing in price competition in countries it operates in; and faster-than-expected monetisation of 5G development.
On the other end, the following factors could be downsides to the counter: further wireless margin compression triggered by competition in Singapore and, or Australia; worse-than-expected cannibalisation of wireless voice, SMS and roaming by data; and the failure to monetise 5G development.
The research team at OCBC Investment Research has kept “buy” on Singtel as it sees its latest set of results “encouraging”.
It has also kept its fair value of $2.98 unchanged.
Singtel’s underlying net profit in the 3QFY2022 forms around 21% of the brokerage’s forecast, which is broadly within expectations.
“Barring unforeseen circumstances, Singtel still expects to pay dividends at the upper half of its dividend policy range of between 60%-80% of FY2022’s underlying profit,” notes the team who remains “constructive” on Singtel and its process of unlocking value and capital recycling.
“The group has already disposed of 70% equity stake in [the] Australia Tower Network (ATN) in November 2021, and there have been media reports relating to its Australian fibre assets on a potential sale, partnership with an investor or a sale and lease back,” writes the team in their Feb 16 report.
“We believe that the group’s core businesses remain well-positioned to benefit from the reopening of economies over time, even though visibility is naturally limited at this juncture,” they add.
Potential catalysts, according to the OCBC team, include a significant dividend hike, strong recovery from Covid-19, further asset monetisation and stronger-than-expected recovery in its associate’s contributions.
Investment risks, to them, include a prolonged drag from Covid-19, further cuts to its dividend, stronger-than-expected competition in Singapore and Australia and the inability to unlock value from initiatives.
PhillipCapital analyst Paul Chew has maintained “accumulate” on Singtel with an unchanged target price of $2.86.
“Our sum of the parts (SOTP) valuation is based on 6 times 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,” writes Chew in his Feb 17 report.
To him, Singtel’s revenue and EBITDA for the 9MFY2022 met expectations at 76% and 72% of his full-year estimates.
“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,” notes Chew on Singtel’s results. “Enterprise earning was sluggish from legacy services and lower project wins.”
The way he sees it, 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,” he predicts.
In addition to his unchanged target price, Chew has kept his FY2022 forecast largely unchanged before incorporating a net gain of $261 million from the disposal of ATN.
“As roaming revenue returns, economic conditions improve and competition is more benign, we expect mobile to enjoy earnings growth in FY2022 and FY2023,” he says.
Finally, RHB Group Research’s Singapore team has kept its “buy” call on Singtel with an unchanged target price of $3.37.
Its target price has incorporated a 12% environmental, social and governance (ESG) premium based on the brokerage’s in-house methodology.
Like Maybank’s Tan, the RHB team continues to see Singtel as its top telco pick within the Singapore telco industry, with the earnings recovery theme intact.
“Key re-rating catalysts are the value unlocking and, or monetisation of assets,” writes the team, while key downside risks are “competition, weaker-than-expected earnings and concerns on the possible surge in Omicron cases”.
Shares in Singtel closed 1 cent higher or 0.39% up at $2.56 on Feb 17, or an FY2022 P/B of 1.6 times and dividend yield of 4.6%, according to Maybank’s estimates.
Photo: Samuel Isaac Chua/The Edge Singapore
