Singtel’s NEXT growth engine
NCS set to contribute a bigger slice of ST’s pie
Recent NCS acquisitions have bolstered Singtel’s plan to seek out new regional businesses. Integrating digital, cloud and platform services (NCS NEXT) with existing capabilities should support higher margins. We continue to like Singtel’s ability to: 1) capitalise on regional leadership via exclusive tie-ups with private, public and associates’ businesses; 2) drive new growth engines; 3) unlock infrastructure asset value to drive growth. Reiterate BUY with SOTP-based TP of SGD2.98.
Digitalisation of enterprises not in full swing
We think digital transformation for enterprises is still in its early stage. According to IDC, 28% of organisations in APAC are in the most progressive stages of digital transformation maturity. The three sectors that currently drive NCS’ business are: a) healthcare & transport; b) financial, industrial and commercials; and c) communications, media and technology. This has led to an unprecedented demand surge for digital and technology services, accelerated by Covid-19. While projects can be deployed within 3-5 years, adapting to change can be slow, extending the runway. With Asia-Pacific countries only realising the need to digitalise, it becomes clear that NCS is riding a multi-year trend.
Sustainable margins needed for re-rating
Technology proliferation started before the pandemic and digital economies were already experiencing a global growth spurt. With NCS building new capabilities and expanding its business as a pan-Asian B2B
digital service provider, we forecast NCS’ EBITDA margin to widen on higher-margin cloud services. EBITDA has been on the rise and is currently at 10% of ST’s Group EBITDA. This is a positive, but we see upside if NCS can demonstrate: a) comparable growth in bookings as peers; b) faster-than-expected revenue growth; and c) sustained margin expansion as NEXT’s services form a bigger proportion of NCS’ revenue.