Clearer focus on improving ROIC
? Singtel hosted its annual Investor Day on 31 Aug, after a two-year hiatus.
? Aims to raise ROIC to high-single digits in the mid-term. Positive momentum
seen in the core business. Big scale up for NCS & RDC in the next 3-5 years.
? Reiterate Add and TP of S$3.20 for Singtel, our top Singapore telco pick.
Singtel aims to improve ROIC to high-single digits in the mid-term
Singtel aims to improve its ROIC to high-single digits in the mid-term (FY22: 5.4%), by: a)
capturing growth opportunities in data centres (DCs) and IT services as enterprises
increase spending on digitalisation; b) leveraging positive price momentum in India,
Indonesia, and Australia to grow ARPU; c) deliver on enterprises’ 5G innovation; and d)
continued focus on cost/capex optimisation. Singtel is comfortable with its current net debt/
EBITDA (1QFY3/23: 1.6x), while proceeds from its announced asset recycling programme
now fully cover incremental 5G capex and growth initiatives. Hence, we think it will be able
to pay FY23-25F dividends at the top-end of its 60-80% payout policy.
Bharti’s ROIC may rise to 12-13%; SG & Optus seeing green shoots
Bharti believes that another round of price hikes may be able to lift its ARPU by Rs30-40
(1QFY23: Rs183) and ROIC to 12-13% (1QFY3/23: 8-9%). While cost inflation is slowing
lower-end subs’ upgrade from feature to smartphones, this segment only makes up midteens of its overall revenue mix. Bharti continues to see good revenue growth in the higherend and little downtrading in the mid-end segments. For Singapore and Optus, roaming
revenue has rebounded nicely to 45-50% of pre-Covid-19 levels, despite borders of the big
North Asian markets still closed. Meanwhile, Singtel Singapore’s 5G subs (ARPU uplift of
S$10-15) rose 2.4x from Sep 21 to Mar 22 to 480k (17% of postpaid subs). On 5 Aug, 5G
services were offered to Gomo (Singtel’s digital SIM-only brand) and prepaid subs, where
we gather take-up has been encouraging and the ARPU uplift is at least S$5.
NCS & RDC in big expansion mode; a mid- to longer-term driver
NCS targets to grow its revenue from FY22’s S$2.4bn to S$5bn by FY26F. To achieve this,
it plans to expand its staff force from 12k to 20k, though the additions will mainly come from
lower cost locations (i.e. Vietnam and India). Coupled with the impact from its acquisitions,
NCS said EBIT pressure will likely persist over the next 1-2 years. For its regional data
centre (RDC) platform, Singtel aims to build-up its capacity 4-fold to >220MW (including
JV Co capacity) across Singapore, Thailand, and Indonesia in the next 3-5 years. It is also
looking for suitable partners to expand into other ASEAN countries (e.g. Malaysia,
Vietnam). It expects healthy EBITDA margin of c.50%, even outside of Singapore.
Reiterate Add and SOP-based TP of S$3.20
Re-rating catalysts: FY23-24F core EPS recovery, further asset monetisation, expansion
into higher-growth business areas. Its current share price implies FY23F EV/EBITDA of
just 3.6x for Singtel Singapore and Optus, with attractive dividend yields of 4.3-6.0% p.a.
in FY23-25F. Downside risk: price wars in its key operating markets.
