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1HFY22: Earnings Below Expectations; Recovery Continues Into 2HFY22

Singtel delivered 1HFY22 core earnings of S$983m, a 17% yoy growth on the back of improved Optus performance and a turnaround in associate Airtel. Accounting for 43% and 44% of house and street’s estimates, the earnings were below expectations.
Management alluded towards recovery thanks to the reopening of economy. First interim DPS of 4.5 S cents was declared for 1HFY22. We cut FY22 forecast by 6%, accounting for higher depreciation charges. Maintain BUY. Target price: S$2.75.

RESULTS

• 1HFY22 core earnings below expectations. Singapore Telecommunications (Singtel) grew 2QFY22 core net profit to S$532m (+8% yoy; +18% qoq). This brings 1HFY22 core net profit to S$983m (+17$ yoy) – below expectations as it accounts for only 43% and 44% of house and street’s full-year estimates.

• Key drivers for 1HFY22 include: a) improved Optus performance alongside a 6% A$ appreciation, b) higher associate contributions with the turnaround in Airtel, and c) lower finance expenses. The discrepancy on our end stemmed from lower-than-expected revenue trajectory and higher-than-expected depreciation.

• 1H22 DPS within expectations. The group has declared an interim net DPS of 4.5 S cents/share. This represents 76% of 1HFY22 core PAT payout, in line with its 60-80% dividend policy. We expect full-year net DPS of 10 S cents/share.

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STOCK IMPACT

• Consumer: A nice 1HFY22 for Australia. In Australia, mobile service revenue rose 10% yoy as a result of higher penetration of Optus Choice plans. This led to a 12% yoy increase in ARPU for Optus postpaid to A$40/month (stable qoq) and a net addition of 34,000 postpaid subscribers. Prepaid ARPU was stable at A$20/month with 10,000 prepaid subscribers net additions this quarter. The higher revenue base, mobile package repricing and good cost control led to 1HFY22 EBITDA margin expansion of 2ppt to 29.3%.

• In Singapore, 1HFY22 mobile service revenue was flat but equipment sales fell 8% yoy. Postpaid ARPU was stable yoy but rose S$1/month qoq to S$28/month, while Singtel added 20,000 postpaid subscribers this quarter – thanks to the rollout of 5G services.
Prepaid ARPU was stable yoy but eroded S$1/month qoq to S$13/month. Prepaid subscribers fell by 2,000 qoq.

• Enterprise: ICT revenue rose 10% yoy. Enterprise revenue was flat yoy. A 10% yoy growth in ICT revenue (mainly driven by higher demand for data centres and cyber security services) was partly offset by a 16% yoy decline in fixed voice revenue. EBITDA fell 1.3% yoy due to tapering of JSS credits. NCS experienced a 5% increase in revenue in 1HFY22 but EBITDA fell 21% due to JSS distortion. Underlying EBITDA would have grown 5% yoy.

• Digital: Amobee registered a 19% yoy increase in revenue due to higher advertising revenue vs last year when customers cut back on advertising dollar due to the pandemic. Consequently, EBITDA was US$5m vs EBITDA loss of US$4m in 1HFY21.

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EARNINGS REVISION/RISK

• Trim FY22 net profit by 6% to account for higher depreciation. We expect a recovery in 2HFY22 with the reopening of the economy in the region.

• Management expects to pay out dividends at the higher end of the 60-80% payout range. Associate earnings are expected to be no less than S$1.3b for FY22.

VALUATION/RECOMMENDATION

• Accumulate on share price weakness with a DCF-based target price of S$2.75 (discount rate: 7%, growth rate: 1.5%). At our target price, the stock will trade at 14.5x FY22F EV/EBITDA (slightly above its 5-year mean EV/EBITDA). The stock currently trades at its 5-year mean EV/EBITDA of 13x.

• Key re-rating catalysts include: a) successful monetisation of 5G, b) faster-than-expected recovery in Optus’ consumer and enterprise businesses, and c) market repair in Singapore.