Overview of Singapore Telecommunications (Singtel)

Singapore Telecommunications (Singtel) is a leading telecommunications company offering a diverse range of services, including fixed-line, mobile, data, internet, TV, and digital solutions. The company also has significant operations in Australia, India, Indonesia, Thailand, and the Philippines. With a strong domestic presence and regional influence, Singtel continues to focus on delivering value to its shareholders.

Investment Recommendation

The report maintains its BUY recommendation for Singtel, with a target price of S\$3.58, representing an upside potential of 13.7%. This recommendation is underpinned by improving business fundamentals, strategic growth initiatives, and an attractive dividend yield of 5.2% for FY25.

Key Highlights

1. Improved Return on Invested Capital (ROIC)

Singtel’s ROIC has improved from 8.3% in FY24 to approximately 9% currently, surpassing its weighted average cost of capital (WACC) of around 7%. The management expects ROIC to reach low double digits within the next three years, driven by higher profitability in its core businesses (Singapore and Optus), cost optimization programs, and revenue growth from its growth engines, NCS and Nxera.

2. Value-Unlocking Initiatives

Singtel has identified approximately S\$12-13 billion in monetizable assets. This includes a potential S\$8-9 billion from paring down its 29.44% stake in Bharti Airtel to equalize its holdings with the Mittal family (23.7% stake). Additionally, the company has identified S\$1 billion in non-core fixed assets, S\$3 billion in Thai assets, and approximately S\$1 billion from the redevelopment of its Comcentre headquarters, all of which could drive higher value realization dividends (VRDs) in the next 3-5 years.

3. Dividend Potential

With its ST28 strategy, Singtel is expected to pay higher VRDs, potentially at the upper end of its guidance of 3-6 S cents/share. Every S\$1 billion in cash could translate to an additional 1.9% dividend yield. For FY25, the total dividend is projected to be 16.5 S cents/share, representing a dividend yield of 5.2%.

Financial Performance

Growth Engines: NCS and Nxera

Singtel’s growth engines, NCS (a digital and IT solutions provider) and Nxera (an infrastructure company), continue to deliver robust performance. Nxera is expanding its regional data centers through strategic partnerships, such as the recent deal with Kohlberg Kravis Roberts & Co. (KKR), which involved a 20% stake sale for S\$1.1 billion over three years.

Market Landscape and Challenges

1. Competition in Singapore

The domestic telco market faces stiff competition from lower-priced SIM-only plans and mobile virtual network operators (MVNOs) like Simba, which doubled its subscriber base from 487,000 in February 2023 to 1,053,000 by July 2024. Singtel’s focus on higher-value customers may result in further market share erosion.

2. Market Consolidation Opportunities

Singtel stands to benefit from potential market consolidation in Singapore’s telco industry. Starhub, with its synergies, is a likely candidate for merging with M1, which could rationalize pricing and repair the market. However, Simba’s low-pricing strategy might prolong competition even after consolidation.

Valuation and Recommendation

UOB Kay Hian maintains its BUY recommendation for Singtel with a DCF-based target price of S\$3.58, using a discount rate of 7% and a growth rate of 2.5%. Key re-rating catalysts include successful monetization of 5G, data centers, and NCS, as well as market repair in Singapore. Singtel’s improving fundamentals and strong dividend yield make it an attractive investment option amid market volatility.