Earnings miss but cost cutting plans could woo investors
- 2Q24 net underlying profit of S$550m (+9% y-o-y. -4% q-o-q) was 4-5% below ours and consensus expectations due to weak enterprise business and higher than expected finance costs. 1H24 regular dividend per share of 5.2Scts (+13% y-o-y) based on 77% payout ratio was inline
- Singtel has set an aggressive cost-cutting target of S$200m each year over FY23-26 which is 8-9% of group earnings. This coupled with an absence of S$100m in annual losses from Trustwave should be adequate to offset any negatives in our view.
- Maintain BUY with unchanged TP of S$3.39. key catalysts should special dividends or share buybacks given S$6bn divestment target over the next 3-years out of which S$2bn has been attained already.
Singtel recorded underlying net profit of S$550m (+9% y-o-y, -4% q-o-q), 4-5% below ours and consensus estimates, on weaker enterprise segment and higher than expected finance cost. Singtel Singapore (comprised of consumer and enterprise business in Singapore), saw its operating profit decline to S$210m (-9% q-o-q, -7% y-o-y) to S$210m, stemming from weaker business sentiment affecting enterprise sales coupled with higher depreciation from network and IT investment. Singtel’s net finance cost in 2Q24 rose to S$76m (+46% q-o-q, -7% y-o-y) due to a rise in debt after paying S$1.29bn in dividends in 2Q24.
Core operating profit (EBIT) which excludes associates contribution was up 12% y-o-y but down 7% q-o-q
*Excluding NBN revenue and Amobee results
Source: Company, DBS Bank
Singtel’s core operating profit (EBIT), which excludes associates contribution, stood at S$280m (+12% y-o-y, -7% q-o-q) ~7% below consensus expectation of S$300m due to Singapore enterprise business. Optus 2Q24 EBIT of S$70m (+25% q-o-q, -5% y-o-y) comprised 25% of Singtel’s core operating and was in line with our expectations. Optus was led by mobile service revenue on higher postpaid ARPU (A$42 in 2Q24 from A$41 in 1Q24), subscriber addition and increased content revenue. NCS segment recorded EBIT of S$42m (-18% q-o-q) while Digital InfraCo’s EBIT stood at S$15m (-40% q-o-q, flat y-o-y).
Singtel’s core operating profit which excludes associates contribution exhibits a very high correlation with Singtel’s share price as shown below
Singtel declared an interim dividend of 5.2 Scts (+13% y-o-y) in line with guided payout ratio. In 1H24, Singtel has raised its core interim dividend by 13% y-o-y to 5.2 Scts per share (4.6 Scts per share in 1H23). This translates to a dividend payout ratio of 77%, based on 1H24 underlying earnings per share (EPS) of 6.7 Scts, inline with guided payout ratio range of 60% – 80%. The management has revised its dividend policy upwards to 70% – 90%.
Singtel has disclosed annual cost cutting target of S$200m over FY23-26 which is 8-9% of group earnings. Assuming only 35-40% of this cost saving flow to the bottom-line due to the inflationary pressures, it could lead to 6-7% positive impact on Singtel’s core operating profit and 3-4% impact on group underlying profit each year in our estimates. Singtel would also benefit from an absence of S$100m annual loss from Trustwave (another 8% of core operating profit) from 2HFY24F onwards. While Optus could be adversely impacted due to network outage impact, which is not clear at this time. Optus contributes ~25% of core operating profit so we think cost-cutting and absence of Trustwave losses (14-15% of core operating profit) should more than offset the negatives.
Maintain BUY on Singtel. Singtel achieved 8.3% Returns on invested capital (ROIC) in FY23 (excluding Optus goodwill) and targets low-double-digit ROIC in 3-4 years. This will require further capital divestments, cost-cutting and growth across selective business such as NCS and regional data-center business. Currently Singtel is trading at 45% holding company discount (vs 21-22% historically) and potential share buybacks or special dividends could be catalyst for the stock.
