ROIC and segmental expectations for FY24F and beyond
- Singtel’s return on invested capital (ROIC) to exceed its weighted cost of capital (WACC) in FY24F after a gap of 4 years; Indosat rallied last year after ROIC exceeded WACC
- We expect a 10% y-o-y core operating profit (EBIT) growth in 2H24F led by an absence of Trustwave losses and cost-cuts at Optus; core EBIT has a 84% correlation with the share price
- BUY with TP of S$3.39 for >40% upside potential and 5.5% yield; potential catalysts would be ROIC exceeding WACC, higher dividends and divestments
Singtel is implementing a two-pronged approach to boost operating profits and ROIC. ROIC is generally difficult to improve unless there is a cut in opex and capex. The aggressive cost-cutting of S$200m each year over FY23-26F is one key driver. Potentially, double-digit growth in operating profit at NCS & the data centre business (20% of group core EBIT in 1H24) is another key driver.
We project Singtel would record group core EBIT of S$584m in 2H24F, up 10% y-o-y, flattish h-o-h, due to the following reasons:
- Optus is to benefit from tariff hikes and backend-loaded cost-savings, which would potentially offset the network outage impact. On 8 November 2023, Optus faced a nationwide outage that would have some adverse impact on its revenue in 2H24F. Although, the impact won’t be big and is likely to be short-lived, as per our channel checks. Electricity costs in Australia rose by 46% in 1H24, which impacted Optus’s EBIT in 1H24, leading to aggressive tariff hikes by Optus in mid-2023. Backend-loaded cost-savings at Optus after it right-sized its enterprise business unit should help it achieve sequentially stable EBIT in 2HFY24F, in our estimates. Out of the S$200m cost-savings targeted by the group for FY24F, we expect S$120-130m to be realised in 2H24F, largely at Optus.
- NCS growth to continue, with most of the contract re-repricing done and wage inflation on a decline. Singtel’s NCS EBIT declined by 35% in FY23, despite a 16% rise in revenue due to higher wage inflation. However, NCS has been faring well from 1H24 onwards, with 1H24 EBIT rising by 72% y-o-y on 9% revenue growth. NCS contributed 16% to the group’s core EBIT in 1H24. Ongoing cost-savings at NCS should support double-digit growth, in our view.
- Trustwave losses to be absent from 3Q24F onwards. Trustwave recorded an EBIT loss of S$27m in 2Q24 and S$56m in 1H24. As at 2Q24, Trustwave was classified as a “subsidiary held for sale”, and thus will not contribute any losses to group EBIT from 3Q24F onwards. Following the completion of Trustwave’s divestment, the estimated yearly loss contribution of S$120-130m will also not exist from FY25F onwards.
