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RHB remains ‘neutral’ on telco sector with cost optimisation remaining a key narrative

Felicia Tan
Felicia Tan • 4 min read
RHB remains ‘neutral’ on telco sector with cost optimisation remaining a key narrative
Singtel is RHB's top pick. Photo: Bloomberg
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The Singapore research team from RHB Bank Singapore has remained “neutral” on the telecommunications (telco) sector after the respective telcos have released their results during the earnings season for the quarters ended Dec 31, 2023.

“Further improvement in roaming traffic and cost restraint while competition stayed tight. Cost optimisation remains a key narrative, with industry consolidation not ruled out in the medium-to-longer term,” notes the team.

On the latter, Singapore Telecommunications Z74 -

(Singtel) has targeted $600 million in indirect operating expenditure (opex) savings across Singapore and Australia operations into FY2026. StarHub CC3 - , on the other hand, aims to achieve $280 million in both capital expenditure (capex) and opex savings into FY2027 from the modernisation of its information technology (IT) stack and cloud investments.

On Feb 8, StarHub reported earnings of $149.6 million for the FY2023 ended Dec 31, 2023, marking a 140.4% y-o-y surge due to real growth across all metrics and business segments.

Excluding non-recurring provisions related to StarHub’s DARE+ transformation that was taken in FY2022 and a reversal in FY2023, the telco’s earnings would have been up by 76.5% y-o-y.

Earnings for the 2HFY2023 spiked by 56.0 times to $72.9 million from $1.3 million in the corresponding period the year before.

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On Feb 23, Singapore Telecommunications (Singtel) reported a net profit of $2.6 billion for the 9MFY2023 ended Dec 31, 2023, 52.9% higher y-o-y, mainly thanks to higher exceptional gains.

At the same time, net profit for the 3QFY2023 fell by 12.5% y-o-y to $465 million due to higher net exceptional loss mainly from Optus and Airtel.

“In the December 2023 reporting season, Singtel disappointed on foreign exchange (forex) weakness and lower associate contributions while StarHub trumped estimates on lower-than-expected depreciation,” notes the team in its March 14 report.

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“For Singtel, the 4% y-o-y slide in the Australian dollar (AUD)/ Singapore dollar (SGD) rate impacted revenue translation from Optus, while the steep depreciation of the Nigerian Naira (NRN) crimped associate contributions. StarHub dished out higher FY2023 dividends (6.7 cents, dividend payout ratio or DPR: 80%) as patmi recovered (+140% y-o-y) on early transformation synergies,” it adds.

Based on the telco’s results for the quarter, the team notes that competition within the mobile space is “still keen” with Simba Telecom on the offensive.

“While the price skirmish is largely focused at the lower end of the market and involves mobile virtual network operators, Singtel and StarHub have responded via tactical promotions. Stronger demand for SIM-only plans led to a longer device replacement cycle and softer re-contracting activities,” writes the RHB team.

The telcos also saw overall growth in average revenue per user (ARPU), which were bolstered by the higher roaming traffic and 5G as well as “some seasonality”. Prepaid ARPUs remained stable.

“We gather that Singtel’s Singapore roaming revenues are at [over] 90% of pre-pandemic levels from higher inbound travellers post reopening of China’s border. The reciprocal visa-free arrangement for China travellers (effective Feb 9) should further catalyse roaming traffic going forward,” says RHB.

Meanwhile, the enterprise segment seems to be “marred” by economic headwinds and inflationary pressures although there is still structural demand for digital services with stronger cloud and managed services revenues.

Singtel ‘top pick’

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Between the two telcos, RHB says it prefers Singtel for its improving return on invested capital (ROIC), capital management prospects, and exposure to key markets undergoing price reparation.

“Management has refuted talks of an imminent sale of Optus, which could drive a 10% - 13% share price enhancement based on reported valuations,” says the team.

The team, has, however, cut Singtel’s core earnings for the FY2024 to FY2026 by 8% to 10% to factor in forex weakness and softer associate contributions.

At the same time, it has lifted StarHub’s FY2024 – FY2025 forecasts by 1% - 2% to account for the sale of D-Crypt.

“We believe Singtel is on track to meet the higher end of its 70% - 90% DPR (1HFY2024: 77% DPR), supported by capital management activities and 1.5 times net debt/ebitda,” says the team.

“Downside risks: competition, weaker-than-expected earnings and forex rates. The opposite constitutes upside risks,” it adds.

RHB has rated Singtel at "buy" with a target price of $3.15 while it is "neutral" on StarHub with a target price of $1.18.

As at 12.58pm, shares in Singtel and StarHub were trading at $2.48 and $1.17 respectively.

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