Focused on cost management
- Dividend payout policy was raised to 70-90% of core net profit (60-80% currently). 1H core net profit of S$1.1bn (+12% yoy) largely in line.
- We see continued SG EBITDA margin expansion ahead from ramp-up of core cost cutting programme and divestment of loss-making Trustwave.
- Optus likely to remain a drag, given 1) continued S$ strength vs. A$ affecting translation, and 2) potential customer churn and fines from network outage.
- Reiterate Add with a higher TP of S$2.85 on hiked EPS estimates.
Dividend payout policy raised, core operations in line
Singtel’s 1HFY3/24 core net profit of S$1.1bn (+7% hoh, +12% yoy) was largely in line with expectations, forming 47%/46% of our/Bloomberg consensus’ FY3/24F forecasts. 1HFY24 group EBITDA of S$1.8bn (-5% yoy) was in line, as stronger Singapore (+3% yoy, cost optimisation) was weighed down by weaker Optus (-11% yoy, strong S$). Pretax associates’ contribution up 3% yoy on stronger Bharti (+12% yoy), AIS (+23% yoy).
Cost cuts and Trustwave divestment could help SG margins
As part of a cost out initiative, Singtel guided for S$200m in core cost savings p.a. in FY24-26F, driven mostly by 1) efficiency gains from merged consumer and enterprise divisions, and 2) cost optimisation drives. We think cost synergies will likely materialise more meaningfully in 1HFY25F, as management works through transient integration issues. The divestment of loss-making Trustwave (S$57m loss provision already booked in 1HFY24) is also a key positive (expected to complete by end-CY23F), allowing SG margins to benefit from FY25-26F onwards via the removal of S$105m-110m in annual operating losses. Additionally, we see continued margin expansion for NCS as the subsidiary 1) improves on cost to serve, and 2) enjoys stronger operating leverage from customer base expansion.
Optus: headwinds from FX and potential outage penalties
While we think cost cutting has begun to bear fruit at Optus (1HFY24 EBITDA margin +0.7% pts hoh), continued strength in S$ vs. A$ will likely remain a key near-term drag on earnings contribution to Singtel, in our view. Regarding the nationwide network outage, management intends to offer subs a “gesture of goodwill” but ruled out offering heavy discounts. We have not yet baked in any one-off fines as we await the conclusion of the Australian government’s review.
Reiterate Add at higher TP of S$2.85 on Trustwave divestment
We raise our FY25-26F core EPS by 6-7% on removal of Trustwave losses. Our SOP-based TP rises slightly to S$2.85 on higher EPS estimates. Re-rating catalysts: further asset monetisation, and issuance of special dividends. Downside risks: intensifying price competition affecting ARPUs, large fines levied on Optus, and FX headwinds impacting Optus and associates.