The strategic reset by Singapore Telecommunications Z74 (Singtel) announced two years ago to streamline and reorganise the group’s businesses and unlock value has put the telco on a firmer financial footing and brought about growth.
Singtel’s group CEO Yuen Kuan Moon says: “We’ve simplified our organisation so our businesses have greater agility to pursue growth, divested non-core digital businesses and strengthened our financial position with $5 billion received from the capital recycled.”
As at end of September 2023, Singtel’s gross debt has been reduced by about $1.6 billion while cash balances saw a $3.1 billion boost. Including KKR’s investment of $2 billion and the divestment of Trustwave, the total value realised since the strategic reset should hit $7 billion, says Yuen.
In the latest 1HFY2024 ended September 2023, Singtel saw earnings increase 82.6% y-o-y to $2.14 billion, boosted by an exceptional gain from regional associate Telkomsel’s integration of IndiHome, the largest fixed broadband provider in Indonesia.
However, Singtel’s operating revenue dipped slightly by 3% y-o-y to $7.03 billion due to a stronger Singapore dollar against regional currencies, which caused a net forex hit of over $300 million. On a constant currency basis, revenue would have increased by 2% y-o-y instead.
“Our underlying performance was resilient in the first half despite a challenging macroeconomic backdrop and inflationary pressures,” says Yuen at the results briefing on Nov 9. He foresees currency headwinds to continue soon as the Singdollar stays strong to temper the impact of imported inflationary pressures.
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Despite some softness in its enterprise business, Singtel has maintained a positive momentum in NCS, Digital InfraCo and its mobile businesses in Singapore and Australia. Contribution from its regional associates also grew y-o-y, thanks to better dynamics.
In 1HFY2024, Singtel declared a higher interim dividend of 5.2 cents from 4.6 cents a year ago after raising its dividend policy and underlying net profit increased.
Phase Two of unlock
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Although significant progress has been made, there are further tasks ahead. Singtel’s CFO Arthur Lang says: “We are clearly not out of the woods. We have many more things to do to realise more value for our shareholders.”
In the second phase of unlocking value from its assets, a further $4 billion worth of assets is expected to be monetised over the next two to three years. Singtel has also implemented a programme to drive a 15% reduction in core costs over the next three years, which will save $600 million in costs over the next two-and-a-half years in Singapore and Australia.
“This hinges on two key pillars: eliminating operational inefficiency and harnessing the power of digitalisation to drive productivity. And I assure you that our cost-out programme will not come at the expense of our network, which we will continue to invest to expand its network, resiliency and security,” says Yuen.
Singtel recently announced several collaborative partnerships as it launched its regional data centre business, a unit under the Digital InfraCo segment.
On Jan 31, Singtel debuted its initiative to advance AI development in Singapore and the region, tying up with global and local ecosystem partners across AI, renewable energy, sustainable technologies and talent development.
The initiative comes as the company scales its regional data centre business, gaining a foothold in new markets beyond Singapore such as Indonesia and Thailand where it is building a new generation of green, sustainable and hyper-connected AI-ready data centres.
Bill Chang, CEO of Nxera and Singtel’s Digital InfraCo unit, says: “The launch of the Nxera data centre brand is a key milestone for our data centre business as we look to expand our footprint in the region beyond 200MW over the next three years.”
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“As we build out our data centre business, we are putting in place a purpose-driven, fully aligned group of ecosystem partners with distinctive capabilities and unique platforms that will help us grow this digital infrastructure in an AI world, sustainably and responsibly. This means democratising AI access for enterprises, introducing renewable energy and sustainable technologies, and helping produce the talent for our new generation of data centres.”
Growth engines
According to RHB Research, Singapore is at the epicentre of data centre growth, with 60% of the Asia-Pacific’s data centres located within the country. According to Frost & Sullivan, the Singapore data centre market is projected to grow at a CAGR of 12% to US$2.2 billion ($2.96 billion) in 2025 from US$1.3 billion in 2020.
RHB likes Singtel as a proxy for Singapore’s growing data centre space. Singtel’s regional data centre expansion strategy will see more than 100MW of capacity added over the next three to five years as part of its strategic reset. The group is already the market leader in Singapore, having started data centre operations more than two decades ago. Singtel owns and operates seven data centres nationwide with a rated capacity of more than 70MW.
As for the outlook of Singapore’s telco industry, stronger GDP growth and peaking interest rates are expected to be supportive of the sector in 2024, says RHB. It has an unchanged “neutral” rating in the industry.
“We see a further normalisation of industry roaming revenues in 2024 to pre-pandemic levels (currently at 60%–70%) from the pick-up in visitor arrivals,” says RHB, as this comes on the back of the visa-free deal between Singapore and China, which will be implemented on Feb 9, as well as additional flights between the two countries.
RHB sees this as a boon for Singtel and is keeping the stock as its top sector pick, as it is a regional sector bellwether and a core telco portfolio constituent. RHB has a “buy” call and a $3.20 target price for Singtel.
Meanwhile, DBS Group Research expects Singtel’s shares to rally for two reasons. Analyst Sachin Mittal likes Singtel for its robust geographical diversification.
Singtel holds the top position as Singapore’s integrated player while Optus ranks second in the Australian mobile market.
Additionally, Singtel maintains substantial stakes in key associates across India, Indonesia, the Philippines and Thailand, contributing more than 67% to the group’s operating profit in FY2023.
Singtel’s holding company discount has also expanded to a record 51% (last five-year average of 33%) as the share price has not kept pace with the market value of its associates. In FY2018, the holding company discount stood at 51% as the share price did not reflect the rise in the market value of its associates, especially Bharti in India.
Singtel’s current situation stems from its return on invested capital (ROIC) consistently falling below the weighted average cost of capital (WACC) since FY2020, says Mittal. This decline is attributed to a substantial drop in core operating profit (excluding associates) over the past five years.
He expects the holding company discount to narrow to 20%, with recovery in core operating profit led by annual cost-savings of $200 million and growth in its NCS and data-centre business as well as a divestment target of $6 billion over FY2023–FY2026. “This should uplift the ROIC and support a 90% payout ratio over the next three years,” says Mittal.
