SingTel - DBS Research 2022-11-11: Growth & Yield Mix @ 34% HoldCo Discount

• SingTel (SGX:Z74)'s 1HFY23 (Apr to Sep 2022) underlying net profit of S$1.01bn (+2.1% y-o-y) was 6-7% below our estimates; mainly due to sharp drop in NCS contribution and weaker AUD.
  • NCS operating profit declined by 49% y-o-y to S$53m despite a 16% rise in revenue as SingTel tries to adjust NCS’s operating model as it grows into a pan-APAC IT services provider.
  • Optus’ underlying operating profit rose sharply to A$159m (+175% y-o-y) but below our estimate of A$175m.
• Regional associates’ pre-tax contribution grew by 10.6% y-o-y to S$1,157m, in line with our expectations. A stronger-than-expected Bharti’s contribution of S$336m (+129% y-o-y) more than offsets weaker contributions from Telkomsel (S$455m down 4% y-o-y) and AIS (S$139m down 13% y-o-y). Bharti benefits from higher data usage and tariff hikes in India. See SingTel's announcement dated 10 Nov 2022.

Special dividend surprise.

• SingTel surprised the street with 5 cents special dividend to be paid in two equal tranches of 2.5 cents each. The idea is to share the benefits of the Group’s asset recycling initiatives with shareholders. SingTel also announced 4.6 cents dividend along the expected lines amounting to a 76% pay-out ratio.
• See SingTel's Dividend History.

Growth momentum in Optus is expected to be impacted.

• The recent cyber-attack on Optus is projected to impact its near-term performance, and thus could slow down Optus’ growth momentum in our view. According to the management, churn rate rose in 3QFY23 and is stabilising now. Few thousand customers have left out of Optus’ subscriber base of 10m.
• On a core operating profit level, 2H23F could be dented and possibly record a lower operating profit. We have conservatively lowered Optus’ EBITDA contribution by 9% for FY23F/24F each.

NCS profitability will remain challenged.

• During 1H23, NCS had modified its operating model to become a pan-APAC IT services provider. Operating revenue grew 16% y-o-y to S$1.28bn, supported by broad-based growth across key lines of business, coupled with subsidiary contributions. However, operating profit declined 49% y-o-y to S$53m, largely due to the post-acquisition charges relating to its new Australian subsidiaries – such as staff retention and earnouts – as well as higher staff costs from investments in digital capabilities to support business growth.
• As NCS continues to scale up, the operating profit will face challenges impacting the growth in Singapore core EBITDA.

SingTel - Earnings forecast revision & recommendation

• We cut our FY23F/24F earnings forecast for SingTel by 9%/10% on three folds;
  1. slowdown in Optus growth momentum,
  2. challenges in NCS and
  3. derivative-related investment loss.
• We reduced the growth momentum in Optus due to short-term concerns stemming from the recent cyber-attack, and the weaker AUD is expected to reduce the contribution to core EBITDA of the group. We reduce Optus FY23F/24F core EBTIDA by 9% each to reflect the above negative developments.
• Ongoing scaling activity in NCS will experience near term challenges, prompting us to cut Singapore core EBITDA by 4%/9% during FY23F/24F.
• Finance cost was noticeably high during 1H23 (+46% y-o-y) resulting from a revaluation loss from a derivative as opposed to the revaluation gain achieved a year ago. Bulk of the loss has been absorbed during 1H23 (estimated at 80%) and the remainder is expected to be incurred during 2H23F. Hence, considering the aforementioned factors, we cut our FY23F/24F earnings by 9%/10%.
• Maintain BUY recommendation on SingTel with a lower target price of S$3.15.
  • Our fair value for SingTel’s core business is S$0.72 per share (previously S$0.81), from a lower core profit due to Optus slowdown, drop in NCS contribution, and weaker AUD.
  • We value SingTel's regional associates at S$2.43 per share (previously S$2.46), using a 15% HoldCo discount to reflect a gradual recovery in the core business.