Repositioning NCS For Regional Growth
We came away from a recent NCS meeting more sanguine on its near-term prospects.
We expect NCS to deliver double-digit revenue growth as it focuses on driving digital
services within the government and telecommunications sector. Its recent acquisition
in Australia paves the way for NCS to enter Asia Pacific’s third-largest ICT market, after
Japan and China. It is still too early to monetise NCS as it is on the cusp of ramping up
its business. Maintain BUY. Target price: S$2.90.
WHAT’S NEW
• Smart capital recycling, capitalising on digital growth via NCS. In aligning Singtel’s
strategic roadmap, NCS has been identified as a pillar of growth where its ROIC is expected
to exceed the company’s cost of capital via robust top-line growth and a focus on
government, enterprise and telco sector jobs (leveraging on Singtel’s expertise and
associates’ relationships in the region). In tandem with smart capital recycling, Singtel has
recently monetised a 1.6% stake in Airtel Africa for S$150m to support the future of NCS
and regional data centres.
• Transform NCS into an Asian B2B digital services champion… We came away from a
recent meeting with NCS more sanguine on its near term prospects. For a start, NCS’s CEO
continues to see strong demand for digital (ie data analytics, artificial intellegence), cloud,
platform (IoT) and cyber services. This is expected to drive high double-digit revenue growth
for FY23, aided by the consolidation of Dialog and ARQ group in Australia. NCS booked
S$1,692m of orders and registered segment revenue and digital revenue of 8% yoy and
27% yoy respectively in 9MFY22.
• …by cementing its presence in Southeast Asia, Australia and Greater China. In
essence, NCS’s growth will come from: a) organic – digital services are trending well with
reasonably strong underlying demand from the enterprise segment, b) inorganic – the
acquisition of Dialog and ARQ in Australia is important as it allows NCS to compete in the
Tier 1 league for Australia, and c) synergies in terms of cross-selling, upselling and cost
optimisation. We note that the recent acquisitions were priced within industry range of midteens EV/EBITDA (see table overleaf) with reputable clients. NCS is also currently
assessing synergistic opportunities with Optus enterprise. Key focus markets for NCS are: a)
Australia – being the third largest ICT market in Asia Pacific after Japan and China, b)
Greater China – fastest growing country with good demand, and c) Southeast Asia –
leveraging on associates’ links and NCS’s Singapore presence.
STOCK IMPACT
• Monetisation – Still early days. Management believes it is likely too early to monetise NCS
as it is currently on the cusp of earnings ramp-up against a backdrop of: a) recent
acquisitions in Australia, and b) strong underlying demand for digital services. We do not
discount the potential monetisation/listing of NCS, albeit beyond the next two years.
• Key focus in the near term includes talent acquisition. Management shared that talent
is an important success factor for NCS. The acquisition of Dialog and ARQ will add 1,900
skilled talents to NCS. In this context, ARQ has an academy with a very good track record
in acquiring and retaining talent/human capital. NCS hopes to benefit from this. Additionally,
NCS is currently looking to ramp up headcount in India as its offshore delivery centre. At
this juncture, there are about 300-400 staff in India but this number will grow to 1,000 in the
next three months.
EARNINGS REVISION/RISK
• None.
• Management expects 2HFY22 dividend to be at the upper range of its 60-80% dividend
payout policy, mirroring the absolute dividend amount of 1HFY22. We have forecasted DPS
of 9.5 S cents/share for FY22. This will translate to a dividend yield of 3.6%.
VALUATION/RECOMMENDATION
• Maintain BUY with an unchanged DCF-based target price of S$2.90 (discount rate: 7%,
growth rate: 1.5%). At our target price, the stock will trade at 13x FY23 EV/EBITDA (its 5-
year mean EV/EBITDA).
• 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