Singtel is expected to achieve ROIC breakeven in 2 years
- We project Singtel to improve its Return on Invested Capital (ROIC) and exceed its Weighted Average Cost of Capital (WACC) in 2 years
- Raise FY24F/25F earnings by 3%/5% on better Singapore performance; project 14.5Scts dividend per share (5.7% yield) from FY23F onwards
- Maintain BUY with a higher TP of S$3.18
Among the ASEAN telco stocks, none of them exhibit high growth potential of 15-20% EBITDA growth. An EBITDA growth of over 15-20% implies a company will be experiencing high growth. Based on the table below, only ISAT exhibits a high single digit EBITDA growth profile among the telcos, and that too is stemming from the potential cost synergies because of consolidation with Hutchison.
Hence, investors turn their attention towards another key metric - ROIC. ROIC attempts to calculate a company’s profitability (EBIT – tax) as a percentage of the total capital employed/invested which is a combination of book value and net debt. Companies that are potentially exhibiting slower growth in terms of EBITDA will see investors looking at ROIC as a key measure. It is important that the ROIC exhibits a higher percentage than the company’s weighted average cost of capital (WACC), or else it indicates destruction in value and share price of such companies ought to trade at or below the book value. We estimate a WACC of 7.5% for Singtel which should be exceeded by its respective ROIC over the next 2-years.
We see a 190-basis point rise in ROIC at Singtel over the next 2-years. In the case of Singtel, key factors are (i) a sharp rise in Bharti’s profit from tariff-hike in India (ii) non-core asset-divestments and (iii) roaming recovery in Singapore & mobile re-pricing in Australia. Key catalyst for Singtel is potential recovery in core operating profit from Singapore & Australia, leading to a eduction in holding company discount. Bharti is the biggest factor driving 100bps rise and asset divestment driving 60bps rise.
Bharti Airtel will be a key component driving the ROIC during FY23F/24F led by tariff hike. Bharti Airtel had a challenging FY18 and FY19 due to the Reliance Jio-led disruption in India, which severely impacted Bharti Airtel’s pre-tax contribution to Singtel’s earnings. Reliance Jio’s almost free voice and data services caused a massive disruption, forcing other telcos to drastically cut prices. Many telcos exited the business; however, only Bharti Airtel and Vodafone Idea Ltd stood ground with the brutal war amidst continuing to deal with high amounts of debt.
Bharti has done three tariff hikes since December 2019 supporting the growth in is ARPU. During Nov 2022, Bharti Airtel took a price hike of 57% on its minimum recharge plan of INR99. The new price is INR155 and by Jan 2023, Bharti Airtel had extended it to seven more markets, to boost its ARPU to beyond INR200 levels (2Q23 ARPU was at INR190). Prior to this, it took a 20-25% hike across its prepaid plans effective from Nov 2021. As of FY22, the pre-tax contribution from Bharti Airtel to Singtel’s overall associate contribution stood at 20%, which is expected to rise to 29%/35% during FY23F/24F, supported by expected increase in tariffs. This will support the growth in ROIC by an estimated 100bps in FY24F
During Apr 2021, Singtel announced its asset recycling initiatives to unlock value from its non-core assets. Singtel seeks to utilize these proceeds for 5G capex, growth initiatives and as special dividends. Since Apr 2021, Singtel is estimated to have recycled S$6bn. These proceeds have helped Singtel to reduce its net debt by S$3.4bn or nearly a third from a year ago and has also been able to provide special dividends (5 Scts per share during FY23F). Asset divestment will boost the ROIC of Singtel as it will increase the value of cash and cash equivalents and reduce the invested capital base as a result.
Stabilisation of core operating from Singapore and Australia in 1HFY23 after 4 years of sharp declines. Singtel’s core business in Singapore and Australia are expected to recover from FY24F onwards as i) Optus is witnessing improvement in mobile services revenue due to tariff hikes and ii) Singapore business is experiencing recovery in roaming and prepaid revenue coupled with ARPU uplift from 5G services.
We expect Singapore core business to generate a CAGR of 4.9% over FY23F-25F led by 1.5%/8.0% in Singapore and Australia.
We have raised our FY24F earnings by 3% on better core business performance. We expect better recovery in the roaming and prepaid segments in Singapore supporting the growth in core business operations. We raise our Singapore EBITDA by 4%/8% in FY24F/25F resulting in the overall core EBITDA to rise by 2%/3% in FY24F/25F. Furthermore, we have factored in S$2.4bn in dividends from FY23F onwards, and beyond that Singtel should be able to pay-out 80% from its underlying earnings.
Maintain BUY with a higher TP of S$3.18. Our fair value for the company’s core business is S$0.87 per share (prev. S$0.72), due to higher data center valuation and lower net debt due to recent asset recycling initiatives. We value regional associates at S$2.31 per share (prev. S$2.43), using a 15% HoldCo discount to reflect a gradual recovery in the core business.
FY Mar | 1H2022 | 2H2022 | 1H2023 | % chg yoy | % chg hoh |
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Revenue | 7,653 | 7,687 | 7,259 | (5.1) | (5.6) |
Cost of Goods Sold | (5,810) | (5,915) | (5,456) | (6.1) | (7.8) |
Gross Profit | 1,843 | 1,772 | 1,803 | (2.2) | 1.7 |
Other Oper. (Exp)/Inc | (1,270) | (1,300) | (1,225) | (3.5) | (5.8) |
Operating Profit | 573 | 472 | 578 | 0.9 | 22.5 |
Other Non Opg (Exp)/Inc | 0 | 0 | 0 | - | - |
Associates & JV Inc | 1,047 | 1,090 | 1,157 | 10.5 | 6.1 |
Net Interest (Exp)/Inc | (135) | (178) | (196) | (45.2) | (10.1) |
Exceptional Gain/(Loss) | (29) | 54 | 165 | nm | 205.6 |
Pre-tax Profit | 1,456 | 1,438 | 1,704 | 17.0 | 18.5 |
Tax | (496) | (438) | (530) | 6.9 | 21.0 |
Minority Interest | (6) | (5) | (5) | 16.7 | 0.0 |
Net Profit | 954 | 995 | 1,169 | 22.5 | 17.5 |
Net profit bef Except. | 983 | 941 | 1,004 | 2.1 | 6.7 |
EBITDA | 1,620 | 1,562 | 1,735 | 7.1 | 11.1 |
Margins (%) |
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Gross Margins | 24.1 | 23.1 | 24.8 |
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Opg Profit Margins | 7.5 | 6.1 | 8.0 |
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Net Profit Margins | 12.5 | 12.9 | 16.1 |
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