ASEAN Telecom Sector - DBS Research 2019-05-28: Will 5G Hurt Dividends?

ASEAN Telecom Sector - DBS Group Research | SGinvestors.io NETLINK NBN TRUST (SGX:CJLU) STARHUB LTD (SGX:CC3) SINGTEL (SGX:Z74)

ASEAN Telecom Sector - Will 5G Hurt Dividends?

  • Besides 17.5Scts DPS (5.6% yield) (Mar YE), SINGTEL (SGX:Z74) offers 6% earnings CAGR over FY19-21F. This should be driven by associates’ earnings, after 2-years of decline, potentially leading to a narrowing of the holding company’s discount (26% currently vs. 14% historically).
  • NETLINK NBN TRUST (SGX:CJLU) offers ~6% yield in FY20F (Mar YE), and FY19-21F EBITDA CAGR of 6% from 100% fibre migration.
  • STARHUB (SGX:CC3) is reasonably valued at an implied 4% EVA CAGR.

Economic Value Added as the guiding light

The Concept of Economic Value Added

  • Economic Value Added (EVA) is a measure of whether a company is earning better than its cost of capital. A positive EVA indicates that a firm has added value on top of the opportunity cost of capital.
  • EVA = Net Operating after Tax (NOPAT) – Capital charge Or EVA = (ROIC – WACC) x Invested Capital
    • Where Invested Capital = Book Value of Equity plus Net Debt; ROIC = (EBIT – Tax)/(Book Value of Equity + Net Debt)
    • WACC: weighted average cost of capital.
    • ROIC: Return on Invested Capital.

A positive EVA indicates that ROIC is higher than its WACC and the firm is creating value.

  • EVA can be enhanced by investing more capital into the business as long as ROIC exceeds WACC. Even if ROIC is declining but still higher than WACC, the firm will see higher EVA.
  • A negative EVA indicates that ROIC is below its cost of capital and there is value destruction by the firm, as
    • ROIC x Invested Capital = Net operating profit after tax (NOPAT); while
    • WACC x Invested Capital = Opportunity cost of capital So EVA = NOPAT – Opportunity cost of capital.

EVA has been more potent than earnings in explaining market value changes

  • In the paper titled “EVA® AND MARKET VALUE” by Stephen F. O’Byrne, Stern Stewart & Co, the authors found a significant relationship between changes in EVA and market value.
  • More specifically, they observed that 5-year changes in EVA explained 55% of 5-year changes in market value, whereas 5-year earnings changes explained only 24%. As per their research, 10-year changes in EVA accounted for 74% of variation in market value, as compared to 64% explained by 10-year changes in earnings.

There is a formula to value a firm based on EVA

  • The difference between the market value and book value of a firm is called Market Value Added or MVA.
  • MVA = Market Value - Book Value of Equity
  • The link between MVA and EVA is as follows: MVA = Present Value of Annual EVAs
  • This relationship is reproduced from G. Bennett Stewart III, The Quest for Value (HarperCollins, 1991).

If ROIC < WACC, a firm should trade lower than book value ideally.

  • If a firm consistently generates ROIC equal to its cost of capital, then its EVA is zero, suggesting that MVA is also zero. This implies that the market cap of the firm should be the same as its book value. Similarly, if a company keeps generating high EVA, its market value is likely to be higher than its book value. And if a company consistently generates negative EVA (with no hope of a turnaround in the future), its market cap is likely to be lower than its book value.
  • Furthermore, a study by McKinsey found that companies with higher EVAs managed to sustain their outperformance over the medium term relative to those in the lower end, through the infusion of more capital into their businesses. As these companies were already generating higher ROICs, infusion of more capital helped them grow their EVAs even further.
  • Hence, analysing historical performance of EVAs could provide us with a reasonable expectation of the company’s future EVA performance.

2014 vs. Now – Were our predictions true?

  • In our report “Economic profit as the guiding light” released in January 2014, we used a two-stage growth model to understand the market expectations of growth in EVA.
    • If the market cap implies > 10% EVA CAGR over the next 10-years, then the stock is considered expensive.
    • If the market cap implies less than 4-5% EVA CAGR then the stock is considered attractive.
  • Ignoring the structural changes in the markets, such as the threat of the entry of a new operator in Singapore and the high spectrum prices in Thailand weighing on the ROIC of operators, we believe that EVA is a good indicator of future performance and a suitable metric for identifying overvalued opportunities in the region.

Updates to our EVA analysis

  • We believe EVA-based metrics will become even more relevant with the dawn of the 5G-era, as capital allocation and return profiles of 5G use cases remain in a gray area.


  • In our analysis, for the first stage, we assume that companies can grow their EVA at a constant rate over the next 10 years. After 10 years, we assume terminal EVA growth rates of 0% in Singapore, 1.5% in Malaysia and 2% in each of Thailand and Indonesia.
  • Based on the existing market cap of companies, we worked out the implied EVA CAGR over the next 10 years using the relationship between Market Valued Added (MVA) and EVA. We then compared the implied EVA CAGR with historical growth rates to assess if expectations are too high or low from a historical perspective.
  • We also use the MVA/EVA as a metric to assess the sensibility of the current market valuations of counters under our coverage.

Key risks to our view

Tail-end events could distort predictions based on EVA.

  • Predictions based on EVA ignore potential structural changes in the marketplace, regulatory issues and other tail-end events, which could result in severe disparities between predictions based on EVA and actual performance. For instance, the potential entry of a new player in Singapore and the resultant price competition led to severe declines in the profitability and EVAs of Singapore operators, thus distorting previous predictions based on EVA.
  • High spectrum prices weighed on the ROIC of Thai operators, thereby distorting projections made based on EVA. Tail-end events could impact the long-term ROIC generation ability of operators, thereby distorting predictions based on EVA.

NetLink’s valuation implies negative EVA CAGR which is unlikely.

  • Positive EVA is based on ROIC of 7% (regulatory WACC) vs our WACC of 6.0%. Reported earnings are lower than the distributions due to accounting depreciation being much higher than regulatory depreciation. NetLink Trust should continue to report steady growth in earnings and distributions, driven by 100% fibre migration expected over the next 2 years and improving non-Regulated Asset Base (RAB) revenues.
  • Barring changes to regulatory WACC due for renewal in 2022, we believe it is unlikely that NetLink Trust would see negative EVA in the near term.

Singtel’s EVA is likely to grow in the future vs declining EVA in the past led by three key factors.

  1. Improvement in SingTel's associates contribution led by Telkomsel in FY20 (Mar YE) and Bharti entering positive earnings territory in FY21;
  2. Stabilisation of core businesses in Singapore and Australia;
  3. Potential spin-off of its digital businesses in FY21 which are reporting narrower losses but still remain loss-making.

StarHub is reasonably valued at an implied 4% EVA CAGR.

  • StarHub is likely to witness mild contractions in EVA over the near term, as the telco continues to ramp up its cyber-security operations, which are accumulating losses. Mobile and Pay-TV segments are also likely to remain under pressure in the near term, before a potential recovery over FY21/22 post potential consolidation of the mobile sector and StarHub’s successful transition towards a variable content model in the pay-TV segment.
  • We believe StarHub could see low-single digit growth in EVA post FY21/22F.

See attached PDF report for analysis on other ASEAN telcos.

In the same report

Sachin MITTAL DBS Group Research | TOH Woo Kim DBS Research | https://www.dbsvickers.com/ 2019-05-29
SGX Stock Analyst Report BUY MAINTAIN BUY 0.900 SAME 0.900