SingTel - OCBC Investment 2021-05-31: Hitting The Reset Button

SINGTEL (SGX:Z74) | SGinvestors.io SINGTEL (SGX:Z74)

SingTel - Hitting The Reset Button

  • Key strategic initiatives to close the valuation gap; embracing partners and putting options on the table.
  • Dividend policy of 60% - 80% of underlying net profit.
  • Fair Value of S$2.89.

Dividend cut

  • SingTel (SGX:Z74)’s 2HFY21 operating revenue was down 0.7% y-o-y to S$8.2b while EBITDA fell 12.2% y-o-y.
  • The Singapore consumer market saw roaming and prepaid services impacted from the ongoing travel restrictions, while Australia saw a decline in NBN migration revenue and lower retail fixed margins due to a higher mix of low margin NBN customers.
  • In terms of associates, post-tax profit contribution fell 5.1% y-o-y with the drag coming from Telkomsel and Globe, partly mitigated by improved operational performance from Airtel.
  • SingTel's FY21’s underlying net profit of S$1.7b missed ours and consensus expectations, while 2HFY21 dividend was significantly lower at S$0.024 per share, bringing SingTel's FY21 full-year dividend to S$0.075. See SingTel's Dividend History.

SingTel's strategic initiatives to unlock value

  • SingTel's management highlighted a number of key strategic initiatives, including
    1. reinvigorating the core (e.g. advance digital transformation),
    2. capitalising on growth trends (e.g. transform NCS into Asian B2B digital services champion),
    3. reallocating capital, unlocking value (e.g. drive monetisation & value crystallisation across the portfolio), and
    4. championing people and sustainability.
  • Management noted that its stakes in its associates are strategic ones, but are still open to examining options and working with associates so as to better reflect the underlying value of Singtel’s holdings. With digital investments, management shared that they are looking to partner digital native companies, which would be a more pragmatic approach in scaling and capturing market opportunities faster.
  • We are also encouraged by management’s focus on increasing ROIC from mid-signal-digit levels to low-to-mid-teens over the longer term. We believe that management straddles a delicate balance between delivering yield while at the same time growing and delivering on the various strategies.

Fair Value estimate of S$2.89

  • In terms of the FY22 outlook, SingTel expects ~S$1.3b in dividends from its regional associates, and expects capex (including 5G networks) to come up to ~S$2.4b. SingTel will adopt a dividend policy of distributing between 60% - 80% of underlying net profit, and is guiding for sustainable dividends in-line with earnings and cashflow generation.
  • SingTel has had an ESG rating of ‘AA’ by MSCI over the past few years, and MSCI opines that the group continues to institute strong policies to address potential risks related to labor management complexity, cyber-security, ethics, and human rights. Singtel scores well on a number of key issues relative to the industry average, and we thus assign a 10% premium.
  • Following adjustments, our fair value estimate for SingTel rises slightly from S$2.85 to S$2.89.
  • See

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-05-31
SGX Stock Analyst Report BUY MAINTAIN BUY 2.89 UP 2.850