Proxy To Regional Economic Recovery And Reopening
Singtel plans to improve on its ROIC to high single digits by FY25 from 5% in FY22. Proceeds from the group’s asset recycling initiative would be utilised for incremental 5G capex in Australia and current growth engines. The return of international travel has lifted international roaming revenue while both NCS and the group’s data centres plan to expand and ramp up operations. Singtel’s regional associates face a gradual recovery as economies reopen. Maintain BUY with a DCF-based target price of S$2.90.
• Strategic reset with higher ROIC targets… Singapore Telecommunications (Singtel) expects to improve its return on invested capital (ROIC) to high single digits in the next 2-3 years, up from 5% in FY22. This is predicated on: a) return of international roaming revenue, b) 5G network superiority to bundle products and differentiate services, c) absence of Amobee’s losses, and soon enough, Trustwave’s losses, d) fast-growing momentum from NCS, e) cost discipline and digitalisation, and f) turnaround of Bharti India.
• …and sustainable dividends. In addition, proceeds from asset recycling (S$5b earmarked from stake sale of Bharti, Optus tower, monetisation of Singtel HQ) would be used to cover incremental 5G capex in Australia and current growth engines (regional data centre, NCS). This protects Singtel’s ability to pay sustainable dividends. With stronger core operating cashflows and an expected earnings recovery, we expect future dividends to grow in line with earnings, at 70-75% payout ratio as compared to its dividend policy of 60-80% of underlying net profit.
• NCS: Future growth engine. NCS has set a revenue target of S$5b by FY27, up ~2x from its current S$2.4b revenue. To capitalise on growing demand for digitalisation, NCS has plans to expand its workforce from 12,000 to 20,000 in 3-4 years with most of the increased headcount coming from lower-cost countries such as India and Vietnam. Consequently, EBITDA margin compression would persist in the next 1-2 years due to: a) higher opex investments, b) talent management and rising wages, and c) impact from acquisitions.
• Regional data centres: Expansion underway. Singtel plans to double its data centre capacity in Singapore in the next three years to around 100MW, up from its current 60MW capacity. The group’s regional data centres currently contribute around S$250m in annual revenue and S$150m in EBITDA respectively. Also, through partnerships, Singtel plans to add an additional 20MW in Thailand and 100MW in Indonesia. This will create a data centre (DC) asset close to S$7b-8b within five years.