On Track To Deliver Growth For Shareholders
9MFY22 results may mirror 1HFY22’s mid-teen yoy growth. The quarter will be characterised by positive postpaid momentum in Singapore, a good run for Optus and narrowed digital losses. 3QFY22 will see the return of roaming revenue, albeit it still being early days. Separately, data centre development in Thailand is underway as Singtel aims to hold 170MW of DC capacity in the next 3-5 years (at a valuation of S$7b8b). Maintain BUY on share price weakness with a DCF-based target price of S$2.75.
WHAT’S NEW
• On strong footing… We expect Singapore Telecommunications (Singtel) to report a 15- 20% yoy increase in 9MFY22 earnings to S$982m, mirroring 1HFY22’s 17% yoy growth in net profit. 3QFY22 will be characterised by: a) stronger postpaid revenue thanks to recovering roaming revenue and encouraging 5G take-up in Singapore, b) continuous improvement in Optus’ performance, and c) better performance in the digital business portfolio. The sustainability of roaming revenue depends on the reopening of Southeast Asia’s international borders.
• …albeit sequentially weaker associate earnings. We expect the upcoming quarterly results to be partly offset by sequentially weaker associate earnings. For 3QFY22, contribution from regional associates could be dragged down by lacklustre performance in India and the Philippines. In India, Bharti Airtel saw core earnings dropping 3% yoy and 27% qoq amid higher opex and finance cost. This was partly offset by a 6% qoq ARPU uplift after the recent tariff hike as well as stellar performance from Airtel Africa. Globe’s core earnings were weak (-25% yoy, – 42% qoq) amid soft service revenue growth, higher opex and depreciation. Positively, AIS in Thailand is experiencing a 10-15% ARPU uplift as 5G subscribers base grew to over 2.2m (5% of total subscribers) as of end-21.
• Cementing 5G coverage in Singapore. We gather that Singtel currently has more than 1,000 standalone 5G sites across Singapore, and is on track to meet IMDA’s target of 50% population coverage by end-22. Singtel also notes encouraging 5G adoption via bundled packages. This has led to ARPU uplift (for 5G bundles) and helped address dilution from 4G SIM-only plans. To recap, Singtel’s postpaid ARPU stabilised at S$28/month in 1HFY22 thanks to encouraging 5G bundled take-ups. Additionally, Singapore continues to exhibit rational competition within the prepaid segment with incumbent telcos gaining momentum in terms of subscriber growth. We expect GOMO to mirror GIGA’s positive subscriber growth
trend.
• On track to develop DCs in Thailand via partnership. On 3 Feb 22, Singtel executed a joint development agreement (JDA) with Gulf Energy and AIS to jointly develop and operate data centre(s) (DC) in Thailand. While the actual DC capacity remains in discussion, we note that Singtel aims to grow its regional DC capacity by ~70MW to reach a total capacity of ~170MW (in Singapore and the region) within the next 3-5 years (see RHS chart). The partnership with Gulf is seen as complementary to Singtel given Gulf’s power asset business (security of power supply being an integral part of data centre) and influence in the society.
• Regional DC capacity of 170MW with S$8b valuation. Currently, Singtel has seven data centres in Singapore with 70MW capacity. It aims to add another 100MW of capacity to Singtel’s DC portfolio over next 3-5 years. This will create a DC asset value of S$7b-8b within five years. Singtel recently announced that they are building a 30MW integrated cable landing station and data centre in Singapore, with funding being currently worked out with potential investors.
• Seeking “best solution” for Amobee and Trustwave. We understand that the Trustwave business in North America is currently carved out and management is looking to divest it. Both assets have been de-emphasised following the write-down in Dec 21 (amounting to ~S$1b of impairment)
STOCK IMPACT
EARNINGS REVISION/RISK
• None.
VALUATION/RECOMMENDATION
• Maintain Buy 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 and resumption of regional roaming revenue.