Analysts are keeping a positive stance on Singapore Telecommunications Z74 (Singtel) following its latest
Singtel had on May 23 announced its FY2024 ended March results, which saw earnings drop 64% y-o-y to $795 million, due to a hefty impairment on the value of its Australia subsidiary Optus and the Australia arm of its enterprise tech services unit NCS.
If the exceptional items are excluded, Singtel's underlying net profit for the year was up 10% y-o-y to $2.26 billion.
Revenue was also down 3.4% y-o-y at $14.1 billion.
Despite the lower bottom line, the company plans to increase its total FY2024 payout to 15 cents, an increase of 52% over what was paid for FY2023. This will be the third increase in dividends. The group declared a final dividend of 6 cents per share plus, a so-called value realisation dividend (VRD) of 3.8 cents. This VRD, to be maintained at between 3 and 6 cents a year, is drawn from the excess cash from Singtel's asset recycling efforts, minus off capex required to invest for new growth.
Alongside its earnings results, Singtel announced its new growth plan to deliver enhanced customer experiences and sustained value realisation for shareholders - Singtel28 (ST28).
UOB Kay Hian has maintained its “buy” call and $2.99 target price on Singtel, as the FY2024 results were in line; new dividend policy to include the VRD; and a new strategic plan to unlock value.
“In our view, Singtel remains an attractive play against elevated market volatility, underpinned by improving business fundamentals and a lush FY2025 6.8% dividend yield,” says analysts Chong Lee Len and Llelleythan Tan.
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Singtel’s Australian business Optus has an improved outlook. Moving into 1QFY2025, management expects mobile service revenue to continue its growth from the price uplifts while also sustaining its subscriber growth. In Singapore, performance has remained soft amid competition.
NCS has also seen a weak quarter in 4QFY2024, although FY2024 was an improvement. But 4QFY2024 orderbook amounted to $3.0 billion, up from $2.1 billion in the previous quarter, which the analysts believe would help support revenue growth moving forward.
Meanwhile, Digital InfraCo is still in gestation. “With upcoming new additional capacity from DC Tuas, Batam and Thailand, operating costs were higher to support business expansion, leading to a 3.9% y-o-y drop in FY2024 EBITDA. We expect a ramp-up in investments costs to weigh on margins till FY2025-FY2026,” say Chong and Tan.
As at end March, the group had about $6 billion of capital recycling that the anlaysts reckon would come from paring down its stakes in regional associates and non-core fixed assets. “We estimate that Singtel currently has $2 billion to $3 billion of excess cash after accounting for current growth initiatives which may lead to larger VRDs towards the higher end of the group’s 3.0-6.0 cents VRD policy, in our view,” say the analysts.
“The group also released its outlook for FY2025, which we reckon that it would likely beat, driven by its new strategic plan growth, Singtel28, which is aimed at unlocking and creating shareholder value by lifting the group’s core business performance with smart capital management,” they add.
HSBC Global Research too has kept its “buy” call with a higer target price of $3.00 from $2.90 previously.
“We expect dividends and profits to rise due to growth in the core business and Singtel’s regional associates profits. Singtel’s core business growth should be driven by cost optimisation, growth at NCS and data centre,” say analysts Piyush Choudhary, Rishabh Dhancholia and Vignesh Gopalakrishnan.
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They expect core business EBIT CAGR of about 7% over FY2024-FY2027. They also expect regional associates’ profits to rise as average revenue per user (ARPU) is improving across markets. “As such, we expect underlying net profit to expand. We think outlook for dividends is upbeat with additional dividend from asset recycling initiatives,” say the analysts, as they forecast DPS to rise by about 9% y-o-y in FY2025 to 16.4 cents and 8.4% y-o-y in FY2026 to 17.8 cents.
RHB Group Research too has reiterated its “buy” recommendation, while increasing its target price to $3.25 from $3.15 previously.
The research house views Singtel’s new absolute commitment on surplus cash to be returned and the sharpened narrative on earnings delivery positively. It is also positive on the further expansion of FY2024 return on invested capital (ROIC) to 9.3% and is expected to rise to more than 10% in FY2025, based on RHB’s estimate.
Capital management upside, ROIC accretion and price repair in key markets are key investment thesis and share price catalysts.
Maybank Securities has also raised its target price to $3.24 from $3.10. It has a “buy” call on the stock.
Analyst Hussaini Saifee says: “Singtel’s FY2024 results and guidance surprised us positively on multiple fronts: higher-than-expected FY2024 dividends with a higher-for-longer medium-term dividend guidance; a firm core business growth outlook; and falling core capex intensity.”
While the growth outlook and dividend commitments are at a multi-year high, the HoldCo discount is also close to cat an all-time high of over 40%. This is a buying opportunity, according to Saifee.
“Cutting our profit forecasts by 5-8% after factoring in FY2024 results and foreign exchange. We forecast FY2025-FY2027 DPS of 16-18 cents, translating to a firm 7% dividend yield,” he adds.
DBS Group Research too recommends to “buy” Singtel with a target price of $3.50, higher than the previous target price of $3.27, as analyst Sachin Mittal factors in a 20% rise in Bharti Airtel’s share price over the last three months.
Overall, regional associates, are worth $2.74 (previously $2.51) after a 20% HoldCo discount.
“Our fair value for Singtel’s core business in Singapore and Australia remains unchanged at 76 cents per share. Bharti comprises 49% of our Sum-of-the parts (SOP) valuation and 22% of FY2025 group earnings,” says Mittal, who sees Singtel as a cheap proxy to Bharti especially with its core operating profit resuming growth led by NCS, data-centre and cost-cutting measures.
Meanwhile, Morningstar had rated Singtel three stars out of five with an increased target price of $2.50 from $2.40. The increase was due to the increased share prices of its listed associates since the previous update, particularly Bharti Airtel and an increase in underlying earnings due to reduced depreciation following $513 million of asset write-downs made in FY2024, partially offset by higher capital expenditure.
“The stock looks broadly fairly valued at these levels and we suspect the company will need to show persistent earnings growth from its core operations before it will get a positive rerating,” says analyst Dan Baker.
On an underlying basis, meaning constant currency and excluding the sale of Trustwave, second-half operating revenue fell 1.8%, while EBITDA and EBIT increased 1.9% and 8.3%, respectively.
“We retain our narrow moat rating for Singtel. Our fair value implies a P/E for Singtel of 12x underlying earnings, which is below its average over the past 10 years, but reasonable for a low-growth telecom company,” adds Baker.
Additionally, OCBC Investment Research had kept its “buy” call and has a fair value estimate of $3.04.
The group remains focused on reinvigorating the core business while capitalising on growth trends including growing their 5G market share, expanding the footprint of its new digital businesses and scaling up NCS. “We are constructive on NCS as an important growth driver, though upside to EBITDA margins might be challenging in the near term given the cost involved in recruiting suitable talents,” say the OCBC research team.
Management targets low double-digit ROIC in the medium term as Singtel continues to drive cost efficiency, improve margins in the core business and scale growth engines such as NCS and the regional data centre business.
“We see the new dividend policy as a positive surprise, underscoring management’s confidence in its asset recycling initiatives,” they add.
As at 3.05pm, shares in Singapore are trading at $2.43.
