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Encouraging performance with full-year DPS likely at upper half of guidance payout range

• Focused on attaining low-to-mid teens ROIC levels in mid-to-long term
• Looking forward to recovery on reopening hopes
• FV of SGD2.98

Investment thesis

Singtel’s 1HFY22 results exhibited good momentum, with notable strength in Australia Consumer and Airtel’s turnaround. Underlying EBITDA rose 16% YoY on the back of Optus’ margin expansion from mobile re-pricing & cost control, growth in NCS revenue from higher demand for digital services, as well as improved performance of Amobee and Trustwave. Regional associates’ pre-tax profits rose 21% YoY to SGD1.0b on the back of strong turnaround in Airtel led by robust operating improvements in India & Africa. Singtel has declared an interim DPS of 4.5 S-cents, which translates to a 76% payout ratio on underlying net profit. Over the mid-long term, Singtel targets SGD2b of capital recycling to unlock value across assets such as infrastructure, data centers and stakes in companies. On associates, management was optimistic about the operating environment in India, on the back of better market conditions and regulatory environment. In Singapore, we note that there are more than 200k 5G customers and understand that 5G plans generate an ARPU uplift of ~SGD10, which helps to offset weakness in legacy business like voice. Management continues to remain focused on growth initiatives and an optimal capital structure to increase ROIC from mid-single digit to low-to-mid-teen levels in the mid-to-long term. Following adjustments, which include more constructive estimates for FY22 and FY23, as well as a smaller ESG premium on the back of ESG rating downgrade, our FV rises from SGD2.89 to SGD2.98.

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Investment summary

Good momentum; turnaround in Airtel – Singtel’s 1HFY22 results exhibited good momentum, with notable strength in Australia Consumer and Airtel’s turnaround. Operating revenue rose 3% YoY to SGD7.7b, or 5% YoY excluding Optus’ NBN migration revenues. Underlying EBITDA (stripping out Optus’ NBN migration & JSS) rose 16% YoY on the back of Optus’ margin expansion from mobile re-pricing & cost control, growth in NCS revenue from higher demand for digital services, as well as improved performance of Amobee and Trustwave. Regional associates’ pre-tax profits rose 21% YoY to SGD1.0b on the back of strong turnaround in Airtel led by robust operating improvements in India & Africa. Underlying net profit rose 17% YoY to SGD983m, which formed ~44% of consensus estimates. Singtel has declared an interim DPS of 4.5 S-cents, which translates to a 76% payout ratio on underlying net profit. Singtel expects FY22 dividend to be at the upper half of its dividend policy range of 60-80% on underlying net profit.

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FV of SGD2.98 – Over the mid-long term, Singtel targets SGD2b of capital recycling (excluding ~AUD1.9b from Optus towers divestment) to unlock value across assets such as infrastructure, data centers and stakes in companies. On associates, management was optimistic about the operating environment in India, on the back of better market conditions and regulatory environment. As for the other markets where its associates operate in, Covid-19 is still a drag especially on tourism-dependent economies, though management remains cautiously optimistic that the situation should improve over time. In Indonesia, we are seeing market consolidation, which should help to reduce industry capacity and produce a healthier industry structure. In Singapore, we note that there are more than 200k 5G customers and understand that 5G plans generate an ARPU uplift of ~SGD10, which helps to offset weakness in legacy business like voice. On the digibank JV with Grab, we understand that the launch in Singapore should take place next year, while the team has regional expansion ambitions as well. Management continues to remain focused on growth initiatives and an optimal capital structure to increase ROIC from mid-single digit to low-to-mid-teen levels in the mid-to-long term. Following adjustments, which include more constructive estimates for FY22 and FY23, as well as a smaller ESG premium (from 10% to 5%) on the back of ESG rating downgrade, our FV rises from SGD2.89 to SGD2.98.

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ESG Updates

• As of September 2021, Singtel’s board lacked an independent majority, fully independent key committees, and an independent chairman. This structure may undermine the board’s capacity to provide strong oversight of management and financial reporting practices. Further, risks highlighted by multiple controversies—related to its data security and business ethics practices have weighed on Singtel’s rating. Still, relative to industry peers, the company appears to have strong labor management programs.

Potential catalysts

• Stronger-than-expected recovery in associates’ contributions
• Significant dividend hike
• Strong recovery from Covid-19
• Further asset monetization

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Investment risks

• Prolonged drag from Covid-19
• Further cuts to dividend
• Stronger-than-expected competition in Singapore and/or Australia
• Inability of strategic review to unlock value from initiatives