Singtel: An In-depth Analysis and Company Update

Broker Name: Oversea-Chinese Banking Corporation Limited (OCBC Bank)
Date of Report: 14 November 2024

Comprehensive Company Overview of Singtel

Singtel, one of Asia’s leading communications technology groups, continues to demonstrate robust performance, with significant growth in EBITDA and EBIT. The company’s diverse portfolio spans next-generation communication, technology services, and infotainment for both consumers and businesses. Singtel’s strategic focus remains on reinvigorating core business operations while capitalizing on emerging growth trends. This includes expanding their 5G market share, growing their new digital business footprint, and scaling up NCS. Despite challenges in recruiting suitable talent, management targets low double-digit returns on invested capital (ROIC) in the medium term, driven by cost efficiency, margin improvements, and the growth of NCS and regional data centers.

Investment Thesis

Singtel’s investment thesis is rooted in its ability to drive cost efficiency, improve margins in core businesses, and scale up growth engines such as NCS and regional data centers. The company’s focus on 5G market expansion and digital business growth positions it well for future profitability. With EBITDA and EBIT growth of 9.0% and 27.3% year-on-year (YoY), respectively, Singtel shows promising signs of a potential turnaround in EBITDA growth after six years of decline.

Investment Summary

Despite weak contributions from associates, capital return remains on track. Singtel’s 1HFY25 operating revenue slightly declined by 0.5% YoY to SGD 7.0 billion, primarily due to the absence of contributions from Trustwave. However, EBITDA grew by 9.0% to SGD 1.9 billion, with an expanded EBITDA margin from 25.4% in 1HFY24 to 27.8% in 1HFY25. EBIT excluding associates’ contributions grew by 27.3% or 16.1% YoY (excluding Trustwave’s losses in 1HFY24) to SGD 738 million. Post-tax profit contributions from associates declined by 4.5% YoY to SGD 817 million, impacted by currency headwinds and weaker performances of Telkomsel and Airtel due to intense competition and currency depreciation. Consequently, net profit fell by 42.4% to SGD 1.2 billion due to an exceptional gain from the issuance of Telkomsel shares.

Financial Highlights and Performance

The financial summary for FY24, FY25E, and FY26E indicates revenue growth from SGD 14,128 million in FY24 to SGD 14,934 million in FY26E. EBITDA is projected to increase from SGD 3,597 million in FY24 to SGD 3,943 million in FY26E. Adjusted PATMI is also expected to rise from SGD 2,261 million in FY24 to SGD 2,983 million in FY26E. The dividend per share (DPS) is anticipated to grow from 15.0 S cents in FY24 to 18.7 S cents in FY26E, reflecting Singtel’s commitment to progressively increasing dividends.

Key Ratios

Key financial ratios for FY24, FY25E, and FY26E highlight an improving EBITDA margin, projected to rise from 25.5% in FY24 to 26.4% in FY26E. Return on equity (ROE) is expected to increase from 9.5% in FY24 to 11.9% in FY26E, while the dividend yield is projected to grow from 4.7% in FY24 to 5.9% in FY26E.

Detailed Company Analysis

Core Businesses and Future Outlook

Singtel’s core businesses have shown improving operating trends. Optus’s revenue remained stable in 1HFY25, with EBITDA up 7.4% due to better mobile performance and cost-out measures. The average revenue per user (ARPU) hike at Optus in May 2024 is expected to have a more significant impact in the upcoming quarters as more users transition to new plans. Singtel Singapore’s revenue slightly declined by 0.9% YoY, while EBITDA rose by 2.6% YoY driven by small and medium enterprise (SME) growth and cost-out measures. NCS continued to show robust growth with a 2.5% increase in revenue and a 24.3% YoY rise in EBITDA, reflecting strong demand for digitalization services and cost efficiency.

Management Guidance and Strategic Initiatives

Management has revised its EBIT growth guidance for FY25 from high single-digit to low double-digit growth, supported by cost savings, strong NCS growth, and the absence of Trustwave losses. Total CAPEX is expected to grow from SGD 2.1 billion in FY24 to SGD 2.8 billion in FY25, with core CAPEX of SGD 1.8 billion and growth CAPEX of SGD 1.0 billion mainly allocated to data centers, equipment, and fit-out for GPU-as-a-Service facilities, and satellites. Singtel’s strategic initiatives under Singtel28 are anticipated to drive continued operational improvements, cost optimization, and recovery of EBITDA.

Environmental, Social, and Governance (ESG) Updates

Singtel’s ESG rating was downgraded in October 2024 due to weaknesses in labor management practices. Optus signed an enforceable undertaking with Australia’s Fair Work Ombudsman (FWO) for alleged underpayment of workers. These lapses were attributed to subpar payroll and attendance systems. Singtel lags behind better-performing peers in labor management and lacks detailed incident response mechanisms for data security, despite leading in overall governance practices. The state-owned entity’s board no longer features government representatives as of September 2024, potentially alleviating concerns about government intervention. Singtel provides business ethics training to all employees, including contractors.

Potential Catalysts and Investment Risks

Potential Catalysts

• Stronger-than-expected recovery in associates’ contributions
• Significant dividend hike
• Strong recovery from Covid-19
• Further asset monetization

Investment Risks

• Prolonged forex headwinds
• Further cuts to dividend
• Stronger-than-expected competition in Singapore and/or Australia
• Inability of strategic review to unlock value from initiatives

Valuation Analysis of Comparable Companies

In comparison to Netlink NBN Trust (NETL.SI) and Starhub Ltd (STAR.SI), Singtel (STEL.SI) exhibits a favorable valuation profile. Singtel’s projected price-to-earnings (P/E) ratios for FY25E and FY26E are 19.6 and 16.7, respectively. The price-to-book (P/B) ratios are 2.1 and 2.0, while the EV/EBITDA ratios stand at 16.2 and 15.3. The dividend yield is expected to increase to 5.0% in FY25E and 5.5% in FY26E, with a return on equity (ROE) projected at 10.9% and 11.5%, respectively.

Company Overview and Financials

As of 31 March 2024, Singtel’s revenue breakdown highlights the contributions from various segments. Singtel Singapore accounts for 27.1% of revenue, Optus 49.7%, NCS 19.8%, Digital InfraCo 2.9%, and Trustwave 0.5%. The share of associates’ pre-tax profits is led by Telkomsel (34.5%), followed by Airtel (32.3%), AIS (14.5%), Globe (12.3%), and Intouch (7.5%).

Earnings and Dividends

Singtel’s earnings per share (EPS) and dividends per share (DPS) have shown notable growth over the years. The EPS increased from 6.6 S cents in FY2020 to 4.8 S cents in FY2024, while the DPS rose from 12.25 S cents in FY2020 to 15.0 S cents in FY2024, reflecting the company’s commitment to rewarding shareholders.

Income Statement and Profitability Ratios

Singtel’s income statement for FY2020 to FY2024 indicates a decline in revenue from SGD 16,542.3 million in FY2020 to SGD 14,127.5 million in FY2024. Despite this, the company managed to maintain profitability, with a gross profit of SGD 8,306.7 million in FY2023. The net income margin for FY2024 stands at 5.63%, while the return on common equity is 3.12%.

Credit Ratios

Singtel’s credit ratios highlight its financial stability, with a total debt-to-EBIT ratio of 10.32 in FY2024 and a net debt-to-EBIT ratio of 6.33. The EBIT to interest expense ratio is 2.70, indicating a comfortable coverage of interest expenses. The long-term debt-to-total assets ratio is 24.52%, reflecting a balanced capital structure.

Analyst Declaration and Disclaimer

The analyst(s) who prepared this report certifies that the opinions contained herein accurately and exclusively reflect their views about the securities of Singtel. They have taken reasonable care to maintain independence and objectivity in respect of the opinions herein. The analyst(s) do not hold any financial interests in the listed entity, and their connected persons do not hold any financial interests in the listed entity. The analyst(s) do not receive compensation related to the inclusion of specific recommendations or views in this report. The reporting line of the analyst(s) is separate from and independent of the business solicitation or marketing departments of OCBC Bank Group. The analyst(s) or their associate confirm that they do not serve as directors or officers of the listed entity, and the listed entity or other third parties have not provided or agreed to provide any compensation or other benefits to the analyst(s) in connection with this report.

Disclaimer for Research Report

This report is solely for information and general circulation only and may not be published, circulated, reproduced, or distributed in whole or in part to any other person without the written consent of OCBC Investment Research Private Limited (“OIR”). This report should not be construed as an offer or solicitation for the subscription, purchase, or sale of the securities mentioned herein or to participate in any particular trading or investment strategy. Whilst all reasonable care has been taken to ensure that the information contained in this publication is not untrue or misleading at the time of publication, its accuracy or completeness cannot be guaranteed, and recipients should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. No warranty whatsoever is given, and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of acting on such information or opinion.

Ratings and Recommendations

OIR’s technical comments and recommendations are short-term and trading-oriented. OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment horizon. A BUY rating indicates total expected returns (excluding dividends) in excess of 10% based on the current price; a HOLD rating indicates total expected returns (excluding dividends) within +10% and -5%; a SELL rating indicates total expected returns (excluding dividends) less than -5%. For REITs and Business Trusts, total expected returns including dividends apply. For companies with market capitalization of S\$150m and below, a BUY rating indicates total expected returns (excluding dividends) in excess of 30%; a HOLD rating indicates total expected returns (excluding dividends) within a +/-30% range; a SELL rating indicates total expected returns (excluding dividends) less than -30%. For REITs and Business Trusts, total expected returns including dividends apply.