Focus on core operating profit trajectory
- 3Q24 underlying earnings of S$559m (flat y-o-y, +1.6% q-o-q) was 6%-7% below our estimates, on sharp drop in Airtel Africa and Telkomsel weakness; core operating profit was in line, led by NCS, Digital Infraco, and an absence of Trustwave losses
- We lower our FY24F/25F group earnings by 9% each on weakness in associates, bringing us 8%/15% below consensus
- Maintain BUY with a lower TP of S$3.27, with 37% upside potential. Key catalysts for the share price will be ROIC upliftment, higher dividends, and divestments
3Q24 underlying earnings of S$559m (+1.6% q-o-q, flat y-o-y) were 6%-7% below our expectations on sharp drop in Airtel Africa and Telkomsel weakness. In 3Q24 (Mar YE), Singtel recorded flattish y-o-y (+1.6% q-o-q) underlying earnings of S$559m, 6%-7% below our estimates. The weakness stems from lower-than-expected pre-tax contribution from associates, which fell by 8.8% y-o-y (-16% q-o-q) to S$509m. Bharti Airtel recorded strong operating profit across the India and Africa segments. However, its pre-tax earnings contribution dropped 21% y-o-y to S$146m. This was due to the steep depreciation of local currencies in Africa, especially the Nigerian naira, leading to currency translation losses for its foreign currency-denominated liabilities. Telkomsel’s performance was impacted by lower mobile earnings on accelerated declines in legacy services and higher operating expenses and depreciation charges.
3Q24 underlying core operating profit (EBIT) of S$324m (+16% q-o-q, +13% y-o-y) was in line, led by NCS, Digital InfraCo, and the absence of Trustwave losses. Singtel’s core EBIT stood at S$324m (+16% q-o-q, +13% y-o-y), led by NCS, Digital InfraCo, and the absence of Trustwave losses. NCS witnessed growth in its Enterprise and Government businesses and NCS EBIT grew by 31% q-o-q (up 139% y-o-y), on the back of resource and cost optimisation and a reduction in acquisition-related costs. NCS recorded strong bookings of S$694m in 3Q24 with a pipeline of projects in various sectors. Trustwave losses were absent in 3Q24, as it was classified as a subsidiary held for sale by the end of 2Q24, saving an estimated S$30m every quarter. Singtel declared an interim dividend of 5.2 Scts per share in 1H24 and is on track to reach the upper end of its 70%-90% payout ratio guidance.
Recovery in core EBIT is crucial in supporting upliftment in ROIC. Return on Invested Capital (ROIC) upliftment is a key catalyst in driving Singtel’s share price and we expect Singtel to breakeven with its weighted average cost of capital (WACC) in FY24F. To support this, recovery in core EBIT from Singapore and Australia is critical. Core EBIT has been exhibiting a positive correlation of 83% with Singtel’s share price over the last six years.
