The most recent results of the two listed telcos showed that efforts by Singapore Telecommunications (Singtel) to transform itself have started to bear some fruit while the rival transformational plans of StarHub are still some distance away from completion.
Over the last few years, the once-comfortable domestic competitive landscape has been disrupted, forcing both Singtel and StarHub to rejig their business directions and organisational structures to resume their growth trajectories.
In 1HFY2023 ended Sept 30, Singtel reported earnings of $1.17 billion, up 23% y-o-y. This was lifted by one-off gains from its asset-recycling strategy, meant to help tease out value from the trove of infrastructure assets the telco and its regional associates own.
In the past 18 months, Singtel has recycled $6 billion of assets in total through divestments. Notable divestments included a 3.3% stake in its India associate Bharti Airtel (Airtel) for $2.54 billion, a 1.6% stake in Airtel Africa for $150 million, its Comcentre headquarters for $1.63 billion, and Amobee for US$239 million ($328.2 million).
About half of the divestment proceeds will go towards funding 5G mobile networks. Another $2 billion to $3 billion will help fund new growth areas such as its regional data centre and enterprise business led by subsidiary NCS. Part of the proceeds has also been used to pay down borrowings, reducing net debt by a third from a year ago.
To reward long-suffering shareholders who have seen the value of their investments drop by a quarter over the last five years, Singtel declared an interim dividend of 4.6 cents per share, representing a payout ratio of 76% of its underlying earnings. It also plans to pay out a special dividend of 5 cents over two tranches of 2.5 cents each. “We are sharing the benefits by returning excess cash to our shareholders after setting aside capital for our growth initiatives,” says group CEO Yuen Kuan Moon.
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Singtel shares closed on Nov 16 at $2.80, up about 6.5% following the announcement of its 1HFY2023 earnings on Nov 10.
Operational improvements
While Singtel was busy poring through its balance sheet to seek opportunities to unlock value, its existing business has seen operational improvement across the board.
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Singtel’s 1HFY2023 operating revenue fell 5% y-o-y to $7.3 billion due to unfavourable currency movements in an inflationary environment as well as the absence of revenue from NBN (National Broadband Network) migration at Optus in Australia and the recently divested Amobee.
However, Singtel’s regional associates reported better numbers, with pre-tax profit contributions as a whole up 15% y-o-y to $1.16 billion.
The standout was Airtel in India, which generated higher average revenue per user (ARPU) through higher usage and tariff hikes. Airtel also saw strong demand for its enterprise and home broadband solutions.
Other associates posted higher revenues from robust data demand and a reopening of their economies. However, profit contributions, except AIS, were impacted by higher depreciation from investments in 5G and fibre networks.
In addition, AIS and Globe were affected by a sharp depreciation in the Thai baht and Philippine peso. The associates’ pre-tax contributions would have grown by 18% had the regional currencies remained stable from the same period last year, says Singtel.
When asked about the group’s hedging strategy, CFO Arthur Lang says: “If you look at our interest and our exposure to exchange rates, most of our costs, particularly network costs, which is a large part of our costs … Almost 90% of it is hedged to the Singapore dollar. We also have limited exposure to the US dollar.”
“All the dividends that we collect from our regional associations, which is over a billion dollars, is hedged 100% upon the announcement of the dividend,” says Lang. However, he admits this has some impact on its income statement as there is currently no hedging instrument available to Singtel to hedge on an effective basis.
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“If you look at our profit and losses, with so many different businesses outside of Singapore, this has only impacted by about $26 million on a net income of over $1 billion,” says Lang, adding that the focus is on cash flow which represents “real money coming in”.
Recently, Optus, Singtel’s Australia subsidiary, also made headlines for all the wrong reasons. In September, it announced it was hit by a massive cybersecurity attack. The personal data of some 10 million customers, or about 40% of Australia’s total population, were stolen. Commentators have described the hack as the worst data breach in Australia’s history.
Singtel says the incident will have a near-term impact on its performance but it is confident of a rebound given its “strong business fundamentals”. Meanwhile, it has provided A$142 million ($130 million) to control the damage. These included investigation costs, credit monitoring services for affected customers as well as replacement of identification cards where needed. However, the amount does not cover potential fines, says Yuen. Lang explains that nothing has been set aside for a potential fine because “nothing formal” has been filed against Singtel.
Daring move
Meanwhile, StarHub’s DARE+ transformation is taking a little longer to realise. The ongoing acquisition of new businesses to resume its growth trajectory is costing the telco — as can be seen from its most recent earnings.
In 3QFY2022, earnings were down 32% y-o-y to $27.4 million and down 18.4% y-o-y to $88.3 million for 9MFY2022. StarHub CEO Nikhil Eapen had previously said he expects FY2022 ending December to see muted results as he front-loads capex.
Excluding one-off expenses relating to the acquisition of rights to broadcast English Premier League matches as well as DARE+ investments, it would have recorded a net profit of $32.3 million in 3QFY2022, still representing a 19.8% y-o-y decline from the previous year. StarHub blames the lacklustre results on lower profit from operations as margins took a hit, falling to 20.6% in 3QFY2022 from 30.1% in 3QFY2021.
“Entering into the last quarter of 2022, we remain focused on our DARE+ journey. Our Infinity Play and M&A strategies have fuelled the growth of our traditional consumer verticals — mobile, entertainment and broadband,” says Eapen.
Overall revenue improved across the board amid the economy reopening. Total revenue was up 14.2% y-o-y to $590.8 million. Mobile revenue was up 8.8% y-o-y as roaming revenue recovered with the reopening of borders. Postpaid monthly ARPU was $31, up from $28 in 3QFY2021 while the number of mobile subscribers increased.
Broadband revenue was up 28.2% y-o-y as StarHub consolidated its majority ownership of MyRepublic’s Singapore broadband business. The higher take-up of more expensive plans helped as well. Entertainment revenue was up 17.7% y-o-y due to higher Premier League subscriptions and higher advertising revenue achieved.
StarHub’s enterprise business continued to show promising growth. Revenue was up 16.3% y-o-y in 3QFY2022 to $220.9 million, mainly from higher contributions from the managed services segment as well as the consolidation of JOS Singapore and Malaysia, which provides technology solutions for enterprises through consultancy and systems integration.
“Beyond that, we are excited about the scalability and possibilities that could be unlocked with our new consumer verticals,” says Eapen, referring to “verticals” such as cloud gaming and digital health service dubbed “LifeHub+”.
StarHub expects the enterprise business to enjoy growth thanks to its “converged offerings” in connectivity, cloud networking and cybersecurity, enhanced by closer integration among its business units which could jointly bid for projects and contracts. “We continue to pursue larger size deals and build a strong order book for better earnings visibility into FY2023,” adds Eapen.
With higher contribution across most segments seen, StarHub is guiding for FY20222 revenue growth to be between 12% and 15% and lower capex commitment of “9% to 12%” of total revenue in anticipation of some capex spend delays. Service ebitda margin, meanwhile, is likely to be “at least 20%” for FY2022. In addition, StarHub will be writing off certain “legacy assets” in the current 4QFY2022.
What analysts say
Analysts are keeping a rather positive stance on Singtel as its strategic reset is showing results. Most specifically, they like the special dividend declared in the 1HFY2023 period.
UOB Kay Hian (UOBKH), RHB Group Research, Maybank Securities and DBS Group Research are keeping their “buy” calls with target prices of $3.15, $3.30, $3.15 and $3.15 respectively.
UOBKH has raised its target price from $2.90 to $3.15, with a view that the stock will trade at 14x FY2023 EV/Ebitda or 1 standard deviation (SD) of its five-year EV/Ebitda mean. “Singtel can chase higher return on invested capital in the current macro environment, backed by favourable tailwinds. With a decent yield of 5.5% for FY2023, Singtel remains an attractive play against elevated market volatility, underpinned by improving near- to medium-term fundamentals,” according to UOBKH.
Singtel is RHB’s preferred stock pick. “The pleasant surprise came from a special dividend. We see further core topline improvement, as roaming traffic regresses to pre-pandemic levels,” says RHB, which has a target price of $3.30.
Meanwhile, Maybank Securities is upbeat about Singtel’s prospects despite the cyber attack on Optus. “Moving beyond provisions for the cyberattack on Optus and NCS’s higher opex, we see further upside in roaming revenue, new growth engine potential and continued strong contribution from regional associates,” it says. Maybank, which has a $3.15 target price on the stock, expects Singtel to be well-positioned to weather the headwinds given its robust financial position and $3.5 billion cash on hand as at end September.
As Singtel’s Lang had pointed out in an earlier interview, he combined value of the group’s associates is around Singtel’s current market value, implying that investors do not accord Singtel’s massive Optus and Singapore business any value.
Analysts have termed this a holding company “discount”. DBS Group Research notes that this discount is now at 34%, deeper than the seven-year average of 25%, as investors fret over tepid earnings in Singapore and Australia, plus the reduced dividend over the past couple of years.
With Bharti Airtel resuming its growth, DBS sees better prospects ahead, with a target price of $3.15. “Core operating profit has already stabilised and is likely to recover in FY2024. This, coupled with asset recycling, implies an upside potential to our FY2024 dividends,” says DBS, who also sees Bharti as the key growth driver on top of recovery in the core operating profit.
On the other hand, analysts are rather mixed when it comes to StarHub, mostly due to the high costs incurred for its DARE+ transformation. Maybank is keeping its bullish “buy” call and has even slightly increased its target price to $1.33 from $1.32.
The more upbeat Maybank has already priced in the high costs in FY2022, acknowledging that this would be the transition year for StarHub to undertake the necessary investments into new growth areas under its DARE+ transformation. However, amid price rivalry and inflation, Maybank believes that Starhub is well-placed to capture the roaming recovery and opportunities when China’s economy eventually reopens. “We believe it is on track to beat its guidance and to continue to offer a 4% sustainable annualised dividend yield,” says Maybank.
RHB, on other hand, has maintained its “neutral” call but with a reduced target price of $1.07 from $1.20. RHB warns that StarHub’s earnings are likely to drop by 21% for the whole of FY2022 and are likely to stay under pressure due to the DARE+ transformation, before rebounding by 19% come FY2023. “This is as the roaming revenue recovery gathers pace alongside some positive synergies from the transformation programme,” according to RHB.
DBS warns StarHub’s earnings recovery will be delayed by a year to FY2024 instead of FY2023, due to the delay in transformation costs, paired with the English Premier League rights-related expenses, which would offset a recovery in StarHub’s mobile and enterprise revenue. DBS is keeping its “hold” rating with a lowered target price of $1.02 from $1.31 previously, although in the event there’s an industry consolidation, a valuation of $1.20 is then seen.
StarHub shares closed on Nov 16 at $1.04, unchanged following the announcement of its 1HFY2023 earnings on Nov 9.
Photo: Bloomberg
