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Singapore Telecommunications Limited SGX: Z74 - on Track for a Stronger FY23F; Stay BUY

    Maintain BUY and SOP-based TP of SGD3.55 from SGD3.37, 32% upside and c.5% yield. FY22 (Mar) core earnings rebounded (+11%) after four consecutive years of decline. The recovery thesis remains intact with the reopened borders fueling a rebound in roaming and mobile revenues. Singtel remains our preferred Singapore telco pick (FY22-24F CAGR: 22%) with the capital recycling and strategic business reset as catalysts. Our TP bakes in a 12% ESG premium, reflecting the exemplary sustainability efforts, which rank amongst the best regionally.

    Look beyond the earnings miss. Singtel’s FY22F (Mar) results fell short of expectations, at 93% of our forecast (consensus: 87%). Relative to ours, the deviation was largely on account of higher tax expense with revenue and EBIT meeting estimates (98-99%). Core earnings lifted 11% as higher associate contributions (+19%) and lower financing cost offset higher taxation against a 2% revenue slippage (flat if NBN migration revenue and Job Support Scheme (JSS) credits excluded). QoQ, core earnings fell 1% from lower EBITDA and revenue seasonality. A final DPS of 4.8 SG cents puts full year DPS at 9.3 SG cents/share – at the top end of its 60-80% guidance.

    Mobile revenue has turned the corner. Singapore mobile revenue was up 4.4% YoY, the third consecutive quarter of increase and +0.5% HoH (vs 1HFY22). Singapore consumer EBITDA (excluding JSS) was flat YoY in 1HFY22 on tight cost controls (FY22: +1%). We see a stronger recovery in the June quarter (1QFY23F) from stronger roaming (roaming traffic was at c.30% of pre-pandemic levels in 4QFY22) and prepaid sales as travel restrictions ease with the full opening of the Malaysia-Singapore borders from 1 Apr. Meanwhile, Australia/Optus mobile revenue consumer mobile revenue gained 6.7% YTD (2HFY22: +3.8% YoY) from higher adoption of the ARPU-accretive Choice plans while EBITDA (ex-NBN) jumped 19% YoY.

    NCS seeing improving pipelines. While pressure from the legacy carriage revenue continued, Optus enterprise EBITDA rose 19% in FY22 due to good cost discipline and mobile performance. NCS (Singtel’s regional digital arm) saw revenue gain 2.3% YoY in 1HFY22, albeit, EBITDA fell 6% (-2% excluding JSS) on higher staff cost related to the scaling up of digital talents. YTD, NCS EBITDA lifted 1.3% on 3.3% revenue growth, the latter driven by accelerated digitalisation in the enterprise (25% of revenue) and public sectors, with digital business making up 49% of revenue (FY21: 41%). Singtel sees incremental revenue uplift of c.SGD300m in FY23F from the recent acquisitions of Dialog and ARQ in Australia.

    Key risks are competition, execution of its strategic business reset, and weaker-than-expected earnings.

Source: RHB Research - 30 May 2022


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