On Stronger Footing
Singtel is set to deliver a three-year earnings CAGR (FY22-25F) of 15% vs -12% during the COVID-19 period (FY19-22). This reflects monetisation of 5G in Singapore and Australia, absence of digital losses (from Amobee), double-digit NCS growth and associates benefitting from the economic reopening. A regional data centre is shaping up as Singtel aims to add another 100MW of capacity in the next 3-5 years to build a DC portfolio worth S$7b-8b. Maintain BUY. Target price: S$2.90.
WHAT’S NEW
• Setting the foundation… In Singtel’s strategic reset, management aims to monetise its 5G investments in Singapore and Australia, unlock inherent asset value (tower, Singapore HQ redevelopment) and recycle the capital into growth levers (regional data centre and enterprise business via NCS).
• …to drive a post-COVID-19 three-year earnings CAGR of 15%. This will pave the way for Singtel to narrow its holding company discount as the company actively reallocates capital to drive core business growth and general sustainable cashflow to enhance shareholder’s value. We project a three-year earnings CAGR (FY22-25F) of 15% vs -12% during the COVID-19 period (FY19-22).
STOCK IMPACT
• Divestment of Amobee within next 12 months… FY23 earnings will also benefit from the absence of Amobee losses (FY22 operating loss of S$70m). As at 31 Mar 22, Amobee was classified as a “subsidiary held for sale”. The sale is expected to be completed within the next year. Net book value of Amobee is estimated at S$220m. We also expect an announcement regarding Trustwave (North American business looking for best fit in terms of merger or divestment) in 2H22. To recap, both assets have been de-emphasized following the write-down in Dec 21 (amounting to ~S$1b of impairment)
• …as Singtel focuses on 5G monetisation in Singapore… Singapore’s 5G consumers are currently being offered, on a bundled basis (connectivity, entertainment, handset), the XO Plus plan. Singtel is also starting to commercialise 5G enterprise applications, particularly in advanced manufacturing processes. For example, the group is working with a key car manufacturer to offer customisable cars to suit a consumer’s preference. Port management is also a target market for 5G application in the near term.
• …and potential price hike in Australia – positive for Optus. While data competition remains intense, Optus recently announced a price increase of AUS$4/month for its legacy plans (in-market prior to the May 21 AUD$6 price hike). This is inclusive of higher data allocation of between 33-60%. The higher price was due to inflationary pressure and ongoing network expansion. In addition, Optus Sport price is also raised to AUD24.99/month from AUD14.99/ month (effective 1 Aug 22) as Optus aim to monetise its products. We expect positive mobile service revenue and EBITDA margin expansion in FY23.
• A green regional data centre with S$8b valuation. FY23 should see detailed announcement on Singtel’s data centre (DC) partnership in both Thailand and Indonesia. Currently, Singtel has 7 DCs in Singapore with 70MW capacity. The goal is add another 100MW of capacity to Singtel’s DC portfolio over next 3-5 years. This will create a DC asset close to S$7-8b within five years. Singtel recently announced that they are building a 30MW integrated cable landing station and DC in Singapore with funding being currently worked out with potential investors.
a) Thailand – Singtel may identify suitable sites to develop data centres in Thailand. Gulf Energy will provide the energy while Singtel will step in with operational expertise. AIS will complete the offer with connectivity services.
b) Indonesia – Telkomsel and Singtel plan to form a JV company to develop DC catering to the regional market. The JV can either acquire existing DCs or develop greenfield projects for DC facilities. If the project is located in Indonesia, Telkomsel will own a higher stake, and if the project is in Singapore, Singtel will be the majority shareholder.
EARNINGS REVISION/RISK
• None.
VALUATION/RECOMMENDATION
• Maintain BUY with a DCF-based target price of S$2.90 (discount rate: 7%, growth rate: 1.5%) as we roll over our valuation window to FY23. At our target price, the stock will trade at 13x FY23 EV/EBITDA (its five-year mean EV/EBITDA).
• Key re-rating catalysts include: a) successful monetisation of 5G, b) monetisation of data centres and/or NCS, and c) market repair in Singapore and resumption of regional roaming revenue.
