For more than two decades, Singapore Telecommunications Z74 (Singtel) has grown the value of its investments in various regional associates. Yet, that value has not translated into any significant improvements in its share price.
The growth is so subdued that the value of Singtel’s 29% stake in India-listed Bharti Airtel is comparable to its own market cap. This means everything else from Singtel’s domestic businesses, Australia unit Optus, and stakes in Telkomsel, AIS and Globe are ignored. “There’s something wrong, am I right?” says Singtel CFO Arthur Lang in an interview with The Edge Singapore.
As part of the bid to juggle competing needs to fund new growth and pay higher dividends to its shareholders, Singtel is well underway on its comprehensive capital recycling programme. In March, Singtel took advantage of the recent surge in Airtel’s shares and sold around $1 billion worth of Airtel shares to US fund manager GQG Partners at the prevailing market price, with no discount necessary.
One would assume that Airtel’s price would come under pressure with the sale of this bloc of shares by Singtel, the largest shareholder. Not in this case though. Bharti Airtel’s share price, inspired by the recovering Indian mobile industry amid an overall bullish market, continued to rise. “I got a hard time from some of my board members,” rues Lang.
Pocketing that $1 billion from Airtel is nice, which can then be used to invest in new growth or fund dividend payouts. More importantly, Singtel’s management can also show the market that a lot of latent value lies within the group that has been ignored.
Partly using proceeds from Airtel and other monetisation efforts, Singtel could woo shareholders by paying a total FY2024 ended March dividend of 15 cents, up 52% from FY2023. This payout level works out to a yield of 6.25% based on Singtel’s closing price of $2.40 on May 21. The 15 cents comprises an interim dividend of 5.2 cents already paid, a final dividend of 6 cents, and a so-called VRD or “value realisation dividend” of 3.8 cents. The improved dividend policy is to DBS Group Research a “positive surprise”.
See also: Optus and NCS bring better 1HFY2025 for Singtel; raises ebit guidance and interim dividend
Lang explains that VRD differs from special dividends, which suggests they are one-off gains and thus difficult to sustain interest and share price after that. VRD signals Singtel’s “constant ability” to reward shareholders using proceeds from active capital management minus the capex needed to fund new growth. Singtel is guiding for a VRD payout to range between 3 cents and 6 cents a year, or an absolute amount between $500 million and $1 billion.
This VRD will be paid on top of the existing policy of paying between 70% and 90% of underlying earnings as core dividends, which was revised last November from between 60% and 80%.
Lang describes these two dividend streams as two levers operating in conjunction. “You can unlock capital for growth but at the same time still return to shareholders without them waiting for growth to come through down the road. That’s the sweet spot,” he says.
This bid to impress shareholders with dividends is part of Singtel’s overall strategic reset launched three years ago when the local telco industry as a whole grappled with slowing growth, the pandemic, and a litany of other structural issues, including damaging competition, in what Lang dubs the “perfect storm”.
‘Quite respectable’
Here is a brief recap of what Singtel has done. It consolidated the core business of Singtel and Optus and came up with a clear target of cost synergies. This will result in around $600 million in savings over 30 months between FY2024 and FY2026, and further cost savings are on the way. On April 29, Optus announced a network-sharing agreement with local rival telco TPG. Other moves made included cutting off loss-making units Amobee and Trustwave. Just by shutting down or selling these businesses, Singtel could raise its ebit by $200 million.
With interest rates rising three years ago, Singtel pared down its net debt by around $4 billion. So, even when interest rates almost tripled, net interest expenses dropped instead by 16%.
Such measures have helped Singtel achieve what Lang calls a “quite respectable” underlying net profit growth of 10% y-o-y in FY2024, an improvement from 7% in the preceding year. Singtel further improved its return on invested capital (ROIC) to 9.3% and is confident it can hit low double-digit levels in the medium term.
Lang says Singtel has largely met its targets set out in its strategic reset three years ago. “The only key issue is that our share price has not performed,” he says. “This sets us up for the next few years. What do we need to do now? How do we position ourselves for growth, not just growth in the business, but also an improvement and realisation of shareholders’ value, how do we transition from transformation to growth?”
Singtel’s key growth plans have been laid down previously. NCS, its technology services unit, has bulked up with a series of acquisitions to capture the digitalisation trend of enterprises. In addition, Singtel roped in private equity firm KKR to ramp up its investments in the data centre business from a combined capacity of 62MW now to more than 200MW. These two businesses make up 12% of Singtel’s ebit today and Lang sees this proportion growing to 20% or even 30% eventually.
Singtel’s regional associates have also generally gone past a rough patch as various market consolidations have taken place, resulting in more measured competitive landscapes where the associates have maintained their positions as either the leading or second-largest players.
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Meanwhile, new growth has emerged from the fixed broadband sector. Penetration rates in India are at a quarter at most and about 49% in Thailand. “There’s plenty of headroom,” says Lang.
Divestment pipeline
Besides operational improvements, Singtel is focusing on active capital management. Under Lang, the company has already monetised some $8 billion worth of assets and identified another $6 billion worth of assets as possible divestments over the next three years. The recent $1 billion raised from selling Airtel shares made headlines but Lang points out that it has plenty of value that can be unlocked by other associates, too.
Besides these equity stakes, Singtel has other assets that can be divested, including sizeable properties at “pretty good locations” like the operations and administration building at Pickering Street in the CBD. There are also other infrastructure assets such as fibre networks and its stake in Singapore Post S08 . When the time is right, Singtel can explore a separate listing of NCS or sell a small stake in Nxera, the regional digital infrastructure unit which includes the data centres, or Optus, which was the subject of speculation a couple of months back.
Lang stresses that Singtel should not be seen as “selling its crown jewels” with the monetisation goal. Rather, the sales should be seen as the unlocking of latent value these assets in a measured manner. Furthermore, Singtel will not sell everything in one shot but stay secure in the fact that it has a ready war chest to be tapped into in the coming few years. “The wonderful thing about this is we can pick and choose, we always want to have that optionality and then move fast.”
India shining
Following the partial divestment of Airtel in March, Singtel still holds an effective stake of 29% in the Indian telco, which is a few percentage points higher than what company founder Sunil Mittal owns. Both parties have previously said the intention is to equalise their stakes, which suggests a few more billion dollars worth of shares that Singtel will be willing to sell.
However, by openly indicating its intention to divest its stake in Airtel, won’t that create an overhang in its share price, which has staged an impressive run of around 70% in the past 12 months alone, and increase the risk of a price reversal?
Lang agrees that such risks are not unwarranted but maintains that Singtel remains very confident about Airtel’s prospects in the coming few years. As a macro investment theme, India is enjoying its moment in the sun, thanks to the China+1 trend. Inflation is not an issue, and its economy is enjoying strong growth of around 6%.
With the brutal price war over, India’s mobile industry has been “repaired”, and the current field of four, possibly three players, is the ideal make-up.
According to Lang, a three-player market strikes the right balance. Everybody can make a decent profit and invest for stable growth. Yet, some semblance of competition will be palatable to the regulators, who are taking their cue from Prime Minister Narendra Modi’s Digital India master strategy.
“What we don’t want is two players to play a market because that would invite regulators to say maybe it’s time to bring in a few more people,” says Lang.
Further impairments?
While Singtel reported improved underlying earnings for FY2024 ended March, the bottom line was marred by a $3 billion write-off it had to take on the value of Optus and the Australian unit of NCS. This follows three years after an earlier round of write-offs of more than $900 million was booked in FY2021, in what was supposed to be the “kitchen sink” year where non-performing assets were cut loose. But even if the write-downs were recorded as non-cash items, would shareholders be pleased to see the habit forming?
Lang explains that part of the write-down in Optus is in the residual goodwill still carried in the books following the acquisition by Singtel more than two decades ago. “Rightly or wrongly, we should have done something about it over time. We took a very hard look at it and have cleaned it up.”
Optus was bogged down by hefty capex and competition and Lang admits two speed bumps slowed a quicker improvement: the network outage last November and the cyberattack in September 2022, which triggered a lawsuit from local authorities. Lang is confident that the returns from Optus would be better.
The impairments taken at NCS on an acquisition binge back in 2022 were largely driven by higher interest rates. Singtel chose to be “a bit more conservative” and wrote off some of that value and Singtel is confident given how NCS is performing, there will be no more impairments. NCS, as a whole, is already generating a “decent” weighted average cost of capital, says Lang.
Lang says he knows Singtel should not surprise investors with such write-downs too frequently. “We hear you, we agree with you. We cannot be making impairments every year, and it has to stop. We’ve taken a very hard look. And we are confident that at this point in time, it is behind us.”
Attracting capital partners and becoming ‘asset-right’
Not many people know that Singtel is already one of Singapore’s largest data centre owners, as this was hidden as part of its broader enterprise business. What Singtel did was carve out data centres and other digital infrastructure assets into a separate company named Nxera and instead highlighted its growth potential and strong ebitda of $160 million, which offers around 55% ebit margin.
From 62MW now, Singtel will double its capacity in two years’ time when its new facility at Tuas is ready. It is aiming for more than 200MW further down the road, with regional expansion together with partners in Batam and Bangkok. As befitting a company in the communications infrastructure business, one of the data centres is directly linked to a key submarine cable. “Customers like that,” says Singtel CFO Arthur Lang.
Instead of footing the hefty capex required all on its own, Singtel has started bringing in external funding, specifically from investment firm KKR, which paid a “very good multiple” of 32 times historical ebitda and a much higher forward multiple.
Singtel plans to go out and attract more external capital to co-invest, like what CapitaLand, where Lang was the CFO, and other property companies are doing. Instead of tapping other capital owners to jointly develop another gleaming mall, Singtel will do the same in digital infrastructure, given how “hot” the sector is. Says Lang: “There is so much private capital coming in; I do think now is the golden moment for us to partner with these people and invest in a very meaningful way.”
Singtel could have funded the growth independently but that might risk suppressing dividend payouts, which will not please shareholders. In contrast, the providers of patient capital for its data centre business like KKR are willing to put up the money, accept no returns for the first few years and wait for the “nice double-digit gain”, says Lang.
As it seeks new growth, Singtel will also introduce new business models. For example, AI is now on everyone’s lips but the cost of investing in building up their own AI capabilities is not something every company can afford or is willing to spend.
Singtel is piloting a service where customers can “rent” graphics processing capacity in the data centres to build their AI capabilities. Singtel has already inked a deal to be the “preferred partner” of Nvidia, the brains behind today’s hottest AI chips. “If this model works, we will tap private capital to help us fund this business. So that’s how we want to scale up growth ventures.” NCS, meanwhile, having chalked up 31% y-o-y ebit growth in FY2024, is expected to continue to grow with external funding too.
In the past decade, movements of interest rates have wreaked havoc on start-up ecosystem funding. For years, when rates were low, start-ups had capital owners throwing more money at them than needed. With higher rates, investors could park their money elsewhere safe and yet still earn a decent return.
Lang maintains that Singtel’s bid to attract external investors will not be susceptible to such trends. First, there is no shortage of capital. “What is more important is the scarcity of high-quality assets,” says Lang, lauding his data centre colleagues who can deftly generate a “very attractive” 55% ebitda margin for the unit.
Other companies are playing the “management” card too. In recent years, property firms like CapitaLand Investment and conglomerate Keppel have transformed into asset managers and not merely asset owners. They generate earnings growth by attracting other people’s money, deploying the funds into assets that they co-own while focusing on operating and managing those assets and collecting a handsome recurring fee along the way.
Lang does not rule out Singtel going down the asset management route in a bigger way. However, he points out there are broader concerns like security. It is thus critical to maintain ownership over certain critical assets such as data centres and network exchanges. “So, we will be asset-right rather than asset-light.” — The Edge Singapore
Singtel’s underlying profitability improves in FY2024
Due to the weaker business environment in Australia, Singtel has written down the value of its assets there.
This led to a 2HFY2024 ended March loss of $1.3 billion, reversing from earnings of $1.06 billion in the year earlier and bringing full-year FY2024 earnings to $795 million, down 64% y-o-y.
Revenue for FY2024 dipped 3.6% y-o-y, weighed down partly by the weaker Australian dollar and the absence of contributions from Trustwave, the loss-making cybersecurity unit that has been sold.
However, the company was able to improve at the operating level, with underlying net profit up 10% y-o-y to $2.26 billion, which, in turn, is an improvement from the 7% chalked up between FY2022 and FY2023. The higher underlying net profit can be attributed to better numbers from NCS, higher interest income from capital recycling, Singtel’s associates Bharti Airtel in India and Telkomsel in Indonesia. “The underlying business is improving,” says group CEO Yuen Kuan Moon.
Specifically, Singtel’s operations in its domestic market generated revenue of $3.89 billion, down 2% y-o-y, while ebit was down 5% y-o-y to $838 million. Ng Tian Chong, CEO of Singtel Singapore, points out that the revenue mix has been changing. For one, voice roaming revenue used to be the cash till, until it was then replaced with data roaming. Thus, Singtel is also focusing on being more efficient, partly by adopting new technologies. “We got to get the cost structure in line with the new reality,” Ng says.
Optus, meanwhile, maintained revenue at A$8.1 billion ($7.25 billion) while ebit edged up 0.5% y-o-y to A$288 million — a level of profitability that is not in proportion to the top line, especially when compared to the other regional associates.
Besides the lacklustre financial numbers, Optus has made headlines over the past two years for the wrong reasons. It suffered a cyberattack in September 2022 and due to a data leak affecting customers, has been hauled to the courts by local authorities. When asked, Singtel management would not be drawn into estimating the potential quantum of penalties other than say it will defend its case. Last November, Optus also suffered a network outrage, adding to the woes.
Nonetheless, Yuen points out that since Singtel acquired Optus 24 years ago, the associate has grown this business continuously to become a “real alternative” for the Australian public to incumbent Telstra.
“It is a healthy and sustainable business that can generate a decent return,” Yuen maintains.
Incidentally, amid the bad press, there was a report in January by the Australian Financial Review that Singtel is in talks to sell Optus to a Canadian asset manager Brookfield for US$11 billion ($14.85 billion). In a carefully worded response, Singtel said: “No transaction relating to the Optus enterprise business is currently contemplated.”
“Whenever there’s interest, we will engage. But, for sure, there’s no impending deal,” said Yuen on May 23 when asked.
Singtel ended FY2024 with cash balances of some $4.63 billion, while debt has been reduced by 7% to $7.78 billion, which helped save 16% in net financing costs. It gained some $8 billion from its asset monetisation efforts launched three years ago and has identified another $6 billion that can be monetised.
The highlight for investors ought to be the improved dividend payout under a new policy. On top of the core dividends to be paid out from improving underlying profit, Singtel has introduced a so-called programmatic variable realisable dividend or VRD. All in, Singtel shareholders are looking at 15 cents for FY2024.
“All the hard work has been done in the strategic reset. We’ve lost all the fat, we’ve become leaner, fitter, and now we can run faster and climb higher,” says CFO Lang.
