Date of Report: September 19, 2024
Broker: Maybank Research Pte Ltd

Key Insights and Market Position

Overview:
Singapore Telecommunications (Singtel) is a telco conglomerate with significant exposure to quality telecom operators across ASEAN, India, and Australia. The company is positioned to benefit from cost and capital expenditure optimization, with the rollout of 5G networks nearing its peak.

Dividend Yield and Balance Sheet:
Singtel offers an attractive dividend yield backed by a healthy balance sheet and favorable capital management strategies. The current holdco (holding company) discount stands at 39%, which the report views as undervalued amid positive market conditions.

India AGR Dispute and Its Impact on Bharti Airtel

Supreme Court Verdict:
India’s Supreme Court dismissed curative petitions from Vodafone Idea and Bharti Airtel, Singtel’s 29%-owned associate, regarding the long-standing Adjusted Gross Revenue (AGR) dispute. Bharti Airtel had an original demand of INR630bn (SGD9.75bn) for AGR dues, with INR180bn already paid.

Impact on Bharti Airtel:
Assuming Bharti Airtel pays the remaining AGR dues in ten equal installments, it could reduce the company’s earnings by 8-16% over FY25-27. Despite this, the AGR impact on Vodafone Idea, India’s third-largest telecom operator, is expected to be far more severe. Vodafone Idea’s high leverage (11x FY25E net debt to EBITDA) raises concerns about its survival, leaving room for pricing improvement in the Indian telecom market or reducing the market to just two major private mobile operators.

Effect on Singtel’s Earnings and Dividends:
Due to the AGR dues, Singtel’s core earnings for FY25-27 are forecasted to be negatively impacted by -4% to -6%. However, dividends are unlikely to be significantly affected, as Bharti Airtel does not provide meaningful dividends to Singtel. Moreover, Singtel has options to increase payout levels or boost VRD (value realization dividends) to mitigate the impact on its own shareholders.

Financial Performance

Share Price and Valuation:
As of September 19, 2024, Singtel’s share price stands at SGD 3.38, with a 12-month price target of SGD 3.45, representing a potential 7% upside. Singtel maintains a “BUY” recommendation from Maybank Research, supported by an SOTP (sum-of-the-parts) valuation.

Revenue and Profit Growth Forecasts:
For FY23, Singtel posted revenues of SGD 14.62bn. Moving forward, the company is expected to maintain a steady revenue growth rate of around 2% annually through FY27, while EBITDA is forecast to grow at a 4% CAGR over the same period. Core net profit is projected to grow at a 17% CAGR for FY25-27, mainly driven by associate contributions, including Bharti Airtel.

Earnings and Dividends Outlook:
The company’s core EPS is set to grow from 13.7 cents in FY24 to 22.1 cents by FY27, representing a 16.1% growth rate over the period. Additionally, net dividend yields are expected to stabilize around 5.9% by FY27.

ESG Initiatives and Governance

Environmental Efforts:
Singtel has taken considerable steps toward its sustainability goals, reducing scope 1 and 2 emissions by 11.31% in FY23. The company has also committed to bringing forward its net-zero goal from 2050 to 2045. In addition, it completed several solar energy generation projects in FY23 that are expected to produce 1,700 MWh annually.

Social and Governance Performance:
The company is recognized for its focus on gender diversity, with 43% of its board consisting of female directors. It also continues to support disadvantaged communities, both in Singapore and Australia, through various initiatives like free mobile data access for students and digital skills programs for workers.

Cybersecurity Concerns:
Singtel’s subsidiary, Optus, has faced data breaches and a cyberattack in 2022, exposing customer information. This remains a significant risk area, but the company continues to take steps to minimize data breach incidents by improving internal processes and educating staff.

Financial Metrics and Leverage

Key Ratios:

• Core P/E Ratio: 18.5x (FY24), expected to fall to 15.3x by FY27.
• Net Dividend Yield: 6.1% (FY23), projected at 5.9% by FY27.
• ROAE: Forecast to increase from 3.2% in FY24 to 15.1% by FY27.
• Net gearing is projected to rise slightly from 14.6% in FY24 to 29.9% in FY27.

Risks and Opportunities

Opportunities for Growth:
Singtel has room for growth in optimizing its Optus business, with potential to improve return on invested capital (RoIC) and free cash flow. Furthermore, easing price competition in key markets and better cost-saving execution could enhance the company’s earnings outlook.

Risks:
On the downside, delays in the Optus restructuring and potential fines related to the Optus network outage could weigh on Singtel’s profitability. The company is also vulnerable to foreign exchange headwinds in its overseas markets, particularly in Australia and India.