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Growth expected of telcos from hereon on new growth engines, investments

Samantha Chiew
Samantha Chiew • 9 min read
Growth expected of telcos from hereon on new growth engines, investments
The worst is over for the local telcos. Full speed ahead towards growth.
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Recent earnings reports from Singapore Telecommunications (Singtel) and StarHub have given investors some optimism that prospects for the sector are looking brighter. Besides braving through the worst of the pandemic, the telcos have also put in place new strategies, sharpened their focus on new priorities and are undergoing active capital management.

On Nov 18, Singtel reported earnings of $954 million for its 1HFY2022 ended Sept 30. This is more than double that of $466.1 million in 1HFY2020, thanks to a boost from its share of results of associates and joint ventures that recorded a profit of $770.3 million, compared to a loss of $290.8 million a year ago.

Notably, Singtel’s associate in India, Bharti, contributed a pre-tax profit of $147 million instead of losses of $30 million a year ago. It had previously been weighed down by years by stiff competition and other market-specific factors.

Singtel’s overall stronger bottom line this year also was also due to the absence of one-off hits taken this time last year.

Operating revenue saw a slight increase of 3.1% y-o-y to $7.65 billion, led by higher mobile revenue in Australia and better showing by its ICT subsidiary NCS.

However, despite the higher earnings, the company plans to pay an interim dividend of 4.5 cents, versus 5.1 cents paid this time last year. Prior to the pandemic, Singtel has been paying an interim dividend of 6.8 cents for several years.

The 4.5 cents is equivalent to 76% of Singtel’s underlying earnings for the half-year and looks on track to achieving its dividend policy of paying between 60% and 80% of underlying earnings for FY2022 ending March 2022.

“This first-half performance underscores our ongoing strategic reset to develop new growth engines in ICT and digital services,” says Singtel’s group CEO Yuen Kuan Moon.

“The pandemic has provided tailwinds of digitalisation that we are leveraging to rebuild our business during this crisis and we continue executing to this strategy by enhancing NCS’s digital capabilities in cloud and data and growing our digital infrastructure to innovate our way through this disruption,” he adds.

To recap, Yuen announced on May 27 a strategic reset for Singtel to tap into digital growth in the 5G era, sharpen the group’s focus and improve shareholders’ value amid the digitalisation boom accelerated by the Covid-19 pandemic.

Singtel’s strategic reset centres around three key tenets: Leveraging its 5G leadership to reinvigorate its core consumer and enterprise businesses; developing new growth engines in ICT and digital services, and unlocking the value of its quality infrastructure assets.

Singtel’s ICT arm NCS will be leading the group’s growth in its enterprise segment. In 1HFY2022, NCS changed its revenue mix significantly, where faster-growing segments such as digital, cloud, platforms and cybersecurity revenue contributed 48% of NCS’s total revenue, up from 37% in the previous half-year.

Furthermore, Singtel in October announced plans to create a regional data centre business and is in discussions with partners to build out new data centres in Thailand, Indonesia and the region to capture the growing demand for critical infrastructure.

In Singapore, it has since secured a site next to its existing Tuas cable landing station for a new integrated cable landing and data centre facility, which will be ready in three to four years and add 30–40 MW in capacity. This new facility will leverage cutting-edge green technology for energy efficiency and environmental performance.

“We are making headway in our other strategic priorities, including the rollout of commercial 5G services and unlocking the value of our infrastructure assets with the partial divestment of Australia Tower Network which operates Optus’ passive telecommunications tower infrastructure,” says Yuen.

Adding on, Arthur Lang, Singtel’s group CFO, says, “In terms of unlocking value [with the sale of the towers in Australia], we will always look for ways to unlock value. It can be through our infrastructures or even through our various businesses. The focus here is not to divest because we want to pay our debts, because our balance sheet is strong. The focus here is to unlock value with a laser focus on ROIC and this is something we will continue to focus on.”

As for its regional associates, Yuen’s expects their outlooks to remain “bright” as the demand for digital services continues to grow within the region and Airtel starts to turn a profit.

“While Coved-19 uncertainties linger, we remain focused on extending our leadership in 5G to drive growth across our core and new business by taking advantage of emerging technologies and continued disruption. These initiatives put us in a unique position to capture growth opportunities as economies open further and travel gradually resumes,” says Yuen.

As a result, analysts are also positive on Singtel as Citi Research, RHB Group Research and DBS Group Research have “buy” calls on the stock with target prices of $3.64, $3.37 and $3.13 respectively.

Citi analyst Arthur Pineda views Singtel’s latest 1HFY2022 results, which is within his expectations, a sign that Singtel has sustained its positive momentum from 1QFY2022 and thereby putting it on track to end FY2022 “materially better”.

RHB Group Research is keeping Singtel its preferred telco exposure with strong FY2022 and FY2023 seen, due to expectations of relaxation of travel restrictions which would “prop up” mobile roaming revenue. “Airtel’s stellar performance should sustain, while the focus on the Asean B2B business and tailwinds from industry digitalisation initiatives will bolster enterprise revenue,” adds RHB.

StarHub acquires to raise its value

The headline number for StarHub’s 3QFY2021 earnings reported on Nov 17 may not be pretty to look at but this was because the drop of 9.5% y-o-y to $40.2 million was compared against a year earlier base lifted by government wage subsidies. If the so-called Job Support Scheme or JSS was excluded, StarHub’s earnings would have increased by 5.1% y-o-y instead.

Meanwhile, revenue increased by 5.6% y-o-y to $517.2 million, thanks to higher contribution from its broadband and enterprise segments but partially offset by revenue from the mobile and entertainment segments.

During the period, StarHub has also made several deals. On Sept 22, it moved to take a 50.1% interest in MyRepublic’s broadband business in Singapore, which boosted StarHub’s market share in Singapore’s broadband market by 6 percentage points to 40%, within biting distance of Singtel’s 43%.

StarHub’s total investment will go up to $162.8 million. An initial consideration of $70.8 million will be paid by StarHub for 50.1% of the shares in the new entity, MyRepublic Broadband, while a deferred consideration of up to $92 million will be paid if future financial performance matrices are met. In addition to equity, StarHub has agreed to refinance $74.2 million of debt for MyRepublic for a period of three years. MyRepublic will retain the remaining 49.9% stake.

“When you look at our acquisition of MyRepublic’s broadband business, we augmented our position in the broadband space, a key segment for us, where it took us close to a parity leadership position in the broadband space, which is important because we are looking into driving multiple products at the base. The household will be the anchor of that and so that was strategic for us to achieve a leadership position in the household,” says StarHub’s CEO Nikhil Eapen.

Along with its results announcement on Nov 17, StarHub also announced it was acquiring a 60% stake in regional ICT services provider HKBN JOS (Singapore) and HKBN JOS (Malaysia) for $15 million. These two entities, which are part of Hong Kong-listed HKBN, have around 30 years of operating track record.

These two recent acquisitions follow StarHub’s investment in Strateq in July 2020. The newly-acquired companies are said to accelerate the execution of StarHub’s Dare+ strategy, which StarHub will release more information on later in November.

This acquisition will further strengthen the telco’s ICT capabilities, enterprise solution offerings and customer footprint across Singapore and Malaysia, as it shifts more weight to the enterprise market and reduces its reliance on the Singapore domestic consumer markets, where competition is stiff even as growth is limited.

Analysts seem to like StarHub’s turnaround story. CGS-CIMB and DBS Group Research both have kept their “buy” ratings on StarHub with target prices of $1.70 and $1.60 respectively.

CGS-CIMB’s Foong notes that despite the stiff competition, 3QFY2021 mobile revenue was down just 0.6% y-o-y on lower excess data usage. On a q-o-q basis, it rose 2.4% due to 3.6% higher postpaid average revenue per user (ARPU) on take-up of 5G plans, and 1.0% postpaid subscriber growth.

Fixed enterprise revenue grew a robust 17.3% y-o-y, led by Strateq, and cyber security, which surged by 73.1%. StarHub said the latter’s growth is sustainable, underpinned by a strong and growing order book into FY2022. Meanwhile, pay TV revenue dipped 4.5% y-o-y on lower subscriptions, while fixed broadband revenue rose 9.5% y-o-y thanks to reduced discounts and upgrading of subscriptions to higher-priced 2Gbps plans.

DBS Group Research analyst Sachin Mittal likes the stock for its three engines of sustainable growth. “StarHub offers 10% annual earnings growth over FY2021–FY2023 led by recovery from the pandemic in FY2022, reversing five years of decline from mobile services; sustained growth in fixed broadband business as consumers shift to higher speed plans while content costs for TV business are reigned in; and growth of cybersecurity & regional ICT services,” he says.

On StarHub’s latest acquisition of the 60% stake in HKBN JOS in Singapore and Malaysia, Mittal sees this as a financially accretive acquisition that could help the group enhance its ICT business.

On the other hand, UOB Kay Hian’s Chong Lee Len is keeping his “hold” call and $1.30 price target. He notes how StarHub managed to eke out growth in its mobile, enterprise and broadband segments. Although Pay-TV saw a 5% y-o-y decline in revenue amid a lower subscriber base and lower commercial and advertising contribution, ARPU improved y-o-y and q-o-q at $43 each month due to a price hike for HomeHub bundled plans.

Chong too expects StarHub’s latest acquisition to be earnings accretive with potential cost synergies stemming from the consolidation of office and warehouse space for rental savings and joint procurement strategies.

Similarly, PhillipCapital has kept its “neutral” call on StarHub with a target price of $1.24. Analyst Paul Chew is upbeat on StarHub’s latest 3QFY2021 growth in its cybersecurity and broadband segments but remains cautious of its “still soft” mobile segment, as roaming contributions remain low.

On the outlook, Chew expects the border re-opening, especially in Malaysia and China, will be key drivers for roaming revenue to return.

Photo: Stock

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