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Hold the line on local telcos but pick up the call on Netlink Trust, say analysts

Samantha Chiew
Samantha Chiew • 8 min read
Hold the line on local telcos but pick up the call on Netlink Trust, say analysts
Hello, please hold the line for these telco stocks.
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The Covid-19 pandemic has demonstrated that the ability to stay connected online 24x7 is getting mission-critical, especially when social distancing and working from home are such a big part of life.

The push towards digitalisation accelerated during the peak of the pandemic, when people were stuck at home and had nowhere else to turn to but the internet for almost everything they do — from working and studying to food, entertainment and shopping.

Therefore, 5G has officially reached the shores of Singapore after years of hype. Local telco StarHub on Aug 18 announced the launch of 5G services for its existing customers, at no extra charges. Currently, its 5G signals cover 53% of Singapore’s populated areas including busy locations and major residential hubs and will expand to reach 70% coverage by September.

With the new 5G network, users with 5G-compatible phones and on StarHub’s Mobile+ or Biz+ plans will be able to enjoy faster and smoother connectivity.

In addition, Singapore’s Infocomm Media Development Authority (IMDA) announced on Aug 17 that it will be support plans of Mobile Network Operators (MNOs) to ride on existing 4G networks to deploy 5G Non-Standalone (NSA) networks as part of trials to allow consumers to enjoy partial 5G experiences, with faster mobile speeds being a key feature.

However, this will be on a “short-term” basis or an interim solution of sorts, until standalone (SA) networks are deployed. With IMDA’s approval, operators will be allowed to conduct market trials and offer some early commercial 5G services to consumers.

Meanwhile, IMDA will work closely with MNOs to develop a regulatory framework that ensures a smooth transition from NSA to the eventual SA networks, which is expected to be ready by 2025.

Growth lag

The stocks of Singapore’s two telcos were previously popular among investors due to their stable financials and attractive dividend yields. However, both counters have not been doing well of late.

StarHub saw earnings for 2QFY2020 ended June drop 5.6% y-o-y to $37.3 million, while revenue fell 18% to $99.4 million from the previous year. The company attributed the decline to lower contributions from its mobile, pay TV, broadband and sales of equipment segments. This was partially offset by higher contributions from its enterprise segment.

More disappointingly for shareholders, StarHub cut its interim dividend by some 45% to 2.5 cents for 1HFY2020 and is still guiding total dividends to be at least 5 cents for FY2020. This is 44% lower compared to FY2019’s dividend of 9 cents, which, in turn, is lower than the peak of 20 cents, last paid out in FY2016.

Furthermore, StarHub’s CEO Peter Kaliaropoulos announced he will be retiring with effect from Oct 31, after just two years at the helm. The 61-year-old cited an unforeseen medical emergency within his family for his early retirement and will leave his yet unknown successor to complete the telco’s multi-year transformation and restructuring.

As a result, analysts are keeping a “neutral” stance on StarHub with overall outlook expected to be grim for at least the next two years as the loss in roaming and tourism-related revenue cannot be replaced until international borders have reopened.

On the bright side, growth in StarHub’s enterprise business is expected to be led by a turnaround in the cybersecurity segment and supported by contributions from the acquisition of Malaysian-based firm Strateq in FY2020.

StarHub is also upbeat on its 5G prospects although at this point in time, it is difficult to tell how much 5G services will boost average revenue per user when fully launched. In an email interview with The Edge Singapore, StarHub is positive that its 5G NSA services will impact its revenue and margins for 2HFY2020 ended December.

As StarHub gears up for an islandwide deployment of 5G network with M1 in a 50-50 joint venture company (JVCo), the telco is estimating $200 million in initial capital investment over a five-year period. Beyond the JVCo, StarHub’s 5G-related investments will include a new 5G core network, network security and resilience as well as relevant spectrum costs but excluding the 3.5GHz spectrum fees that will be shared by both MNOs under the JVCo.

“Given the broad and infinite possibilities of 5G, we are eager to gain an early understanding into our customers’ habits and preferences through our 5G service trial. These essential insights will help us to refine and enhance our 5G product and service offerings for customers as we move into 2021 with innovative ultra-fast and ultra-responsive 5G standalone services,” says StarHub.

PhillipCapital has a “neutral” call on StarHub with a target price of $1.24, DBS Group Research is keeping its “hold” call with a lower target price of $1.16 from $1.37, while CGSCIMB Research has an “add” recommendation with a target price of $1.60.

Static noise from associates

Meanwhile, Singapore Telecommunications (Singtel) booked a 24% y-o-y decline in Ebitda to $897 million in 1QFY2021 ended June after including some $17 million of Jobs Support Scheme credits from the Singapore government, according to its business update on Aug 17.

This came on the back of a 13.9% y-o-y decline in operating revenue to $3.54 billion, which the group said was mainly attributable to “challenging market conditions” due to the Covid-19-induced shutdowns across Singapore and Australia that resulted in travel and movement restrictions, lower footfall in retail stores, and a general dampening in consumer and business spending amid the global economic slowdown.

During the first quarter, Singtel recorded a larger net exceptional charge of $364 million compared to the $34 million in 1QFY2020. The charge consists mainly of Singtel’s share of Bharti Airtel’s additional provisions for adjusted gross revenue following the Supreme Court of India’s decision in July and exceptional tax charges. Airtel is Singtel’s 31.9%-owned associate in India.

Including its other associates, Singtel’s underlying Ebitda came in at $1.27 billion, which DBS Group Research notes is 12% below Street estimates, due to weak Telkomsel and accounting adjustment for Bharti.

DBS, along with OCBC Investment Research, RHB Group Research and CGS-CIMB Research have “buy” calls on Singtel with target prices of $2.85, $3.08, $3.20 and $3.10, respectively. The research houses generally believe that moving forward, Singtel’s associates such as AIS and Globe will support its growth in the near term. During the quarter, even with the big drag from Bharti, the associates, as a whole, grew 5.6% y-o-y.

However, PhillipCapital has a “neutral” rating on Singtel with a target price of $2.44. “We do not see a turnaround in the results until international travel resumes materially for roaming revenue to recover,” says analyst Paul Chew, who also views the operations in Singapore and Australia as Singtel’s two main pressure points and expects that it will result in at least two more quarters of weak y-o-y operating performance.

In Singapore, mobile blended ARPU reached a record low of $23 in 1QFY2021, after falling 27.7% y-o-y. With international travel still highly discouraged, Singtel expects to see ARPU weighed down by the lack of roaming revenue.

In Australia, earnings contribution from the consumer segment of Optus saw the sharpest contractions, with Ebitda falling 32% y-o-y, due to the structural change in its fixed-line business with the migration to the national broadband network (NBN), continuing data price competition and pandemic-related expenses. According to Chew, weakness was across all segments in Australia with broadband bearing the brunt, as on-net broadband subscribers declined by 65% y-o-y.

Nonetheless, analysts agree that Singtel’s yields remain “decent” with dividend yield estimates for FY21 ranging from 3.1% to 5.5%.

Strong connection

Apart from the two telcos, another telco-related stock for investors to look at is Netlink NBN Trust, the sole network infrastructure provider in Singapore.

For 1QFY2021 ended June, Netlink recorded a 12.4% y-o-y growth in PAT to $23.5 million, but revenue declined by 3.3% to $89 million, mainly due to the lower installation-related revenue and diversion revenue, which were affected by the pandemic.

Ebitda grew 3.4% y-o-y to $68.8 million while Ebitda margin rose 5.0 percentage points to 77.3% primarily attributable to the higher proportion of revenue from residential connections and from the government relief grants.

Overall, analysts are bullish on the stock. Maybank Kim Eng is keeping its “buy” rating with a target price of $1.07, as Netlink’s residential and non-residential connection request activities have bounced back to pre-Covid-19 levels in August.

“We maintain our residential and non-residential connections forecast as we expect the two segments to catch up in the remaining quarters. This is driven by the rising trend in telecommuting, home-based learning, as well as better offerings for SMEs,” says analyst Kareen Chan, who likes the stock for its better dividend visibility compared to other yield plays.

OCBC Investment Research feels the same way, saying, “All in, despite the effects of Covid-19, we believe that Netlink still remains a relatively resilient play in comparison to some of its other yield peers. Moreover, on the assumption that there is no further escalation of the Covid-19 situation, we believe that a more normalised level of workforce and construction activity should bode well for Netlink.”

OCBC has a “buy” call on Netlink with a fair value estimate of $1.10. DBS Group Research, however, is less bullish on the stock as it recommends to “hold” with a $1.02 target price. “At current levels, the stock is currently offering a reasonable approximated 5% yield. Amid a low interest rate environment, there is a possibility that Netlink’s regulatory weighted average cost of capital (WACC) (currently 7%) for next review period (Jan 2023 to Dec 2027) will be lowered, which could adversely impact Ebitda from FY2023 onwards,” notes DBS’s Sachin Mittal.

Year to date, shares in StarHub have fallen by 13.4% to close at $1.23 on Aug 19, shares in Singtel have declined by 31.5% to close at $2.33 while Netlink units have risen by 2.7% to close at 96 cents.

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