UOB Kay Hian analysts have maintained their “buy” call for Singapore Telecommunications (Singtel) Z74 with no change to their target price of $3.15.
In their report dated March 17, Chong Lee Len and Llelleythan Tan say that Singtel’s business segments could see favourable tailwinds in 2023. Coupled with the price increases seen in January, the teleco’s Singapore consumer segment is set to experience higher data roaming revenue from China’s reopening.
Chong and Tan’s target price of $3.15 is based on a 10-year discounted cash flow (DCF) valuation, at a discounted rate of 7% and a growth rate of 2.0%, underpinned by improving fundamentals and a “decent” 6.1% FY2023 dividend yield.
“We understand Singapore’s data roaming revenue is currently at 70% to 75% of pre-Covid-19 levels. The reopening of China towards end-December 2022 will help to further lift roaming revenue for the group,” they say.
“We estimate China to potentially be one of the top three contributors of data roaming revenue for the group. Historically, data roaming revenue forms around 20% of Singapore consumer’s revenue and boasts ebitda margins of about 80%,” add the analysts.
Singtel implemented a price increase in January this year, with competitors following suit. Coupled with the continued strong take-up of 5G bundled plans in Singapore, they expect post-paid average revenue per user (ARPU) to continue its upward momentum in 2023, backed by rational competition from incumbent telcos.
Despite stiff competition from Mobile Virtual Network Operators (MVNO), pre-paid ARPU is expected to remain largely stable, supported by recovering travel demand and the return of foreign workers. The loss of the English Premier League broadcasting rights would help support margins as it had been loss-making for the group, note Chong and Tan.
Meanwhile, Optus is seeing a recovery in its subscriber base after its data security breach incident in 2022. According to the analysts, post-paid ARPU is set to improve in 2023 from the overall market recovery, implemented price hikes, higher data roaming and a robust uptake of Optus 5G Choice plans. February also saw a peak in returning students, given that a large majority were Chinese students.
They note that pre-paid ARPU is expected to soften due to irrational and growing competition from MVNOs, although pre-paid subscribers are expected to grow with the return of international tourists.
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After its data-breach incident, Optus’s customer churn has normalised to pre-incident levels and returned to customer net adds since mid-December 2022. However, a weakened Australian dollar may drag Optus’ contribution to Singtel’s overall profitability in 2HFY2023, they add.
Despite robust revenue growth of NCS, Singtel’s wholly-owned subsidiary’s ebitda margins are poised to soften due to operating expenditure investments, higher staff costs and post-acquisition amortisation costs. “Management noted that these costs would be passed down to customers as ongoing contracts expire but would continue pressuring margins in FY2023 and FY2024,” say the analysts.
They add that Singtel has a “robust expansion pipeline” of regional data centres, with plans to double its data centre (DC) capacity with an integrated cable landing station and data centre facility in Singapore in the next three years to about 120 megawatts (MW), up from 60MW currently.
In 1HFY2023, the company’s regional DCs contributed $132 million in annual revenue and $86 million in ebitda. Through partnerships with AIS and Telkom, Singtel plans to add another 20MW in Thailand and 51MW in Indonesia. “The goal is to add another 100MW of capacity to Singtel’s DC portfolio over the next three to five years. This will create a DC asset worth a potential $7 billion to $8 billion within five years,” explain Chong and Tan.
They say that Singtel expects to lift return on invested capital (ROIC) to high-single-digits in the next two to three years, up from 5% in FY2022. This is based on the return of international roaming revenue, 5G network superiority with which to bundle products and differentiate services and the absence of Amobee and Trustwave’s losses. It will also depend on the fast-growing momentum of NCS, cost discipline and digitalisation and a turnaround of Bharti India.
Singtel’s regional associates also feature “robust underlying fundamentals”, according to them. “Excluding weaker regional currencies, Singtel’s regional associates are expected to experience growth in 2023, supported by a ramp-up in regional economic activity,” say Chong and Tan.
Backed by price uplifts, Telkomsel is seeing sturdy pricing momentum and is now looking to increase market share for its home/fixed broadband business. For AIS, the domestic market is expected to face overall market repair with the merger of its closest competitors True and DTAC, they explain.
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Similarly in the Philippines, stiff pricing competition is expected to cool off with pricing discipline expected to return. With increasing market share among active 4G subscribers and upcoming additional tariff hikes, contributions from Airtel are set to grow in 2023, add the analysts.
Key re-rating catalysts to their these include a successful monetisation of 5G, the monetisation of DCs and/or NCS and market repair in Singapore and the resumption of regional roaming revenue.
As at 2.00pm, shares in Singtel were trading 4 cents or 1.68% up at $2.42.
