SingTel, StarHub, NetLink - CGS-CIMB Research 2021-10-08: ESG Leaders For ASEAN Telcos

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SINGTEL (SGX:Z74) NETLINK NBN TRUST (SGX:CJLU) STARHUB LTD (SGX:CC3)

SingTel, StarHub, NetLink - ESG Leaders For ASEAN Telcos

• SingTel/StarHub top our ASEAN telco ESG rankings, while NetLink Trust also did well overall. Areas of strength:
  1. data privacy/security,
  2. network,
  3. corporate governance/ethics.
• SG telcos are way ahead of their regional peers in cybersecurity as at end-CY20 & are well-placed to capture strong future demand in SG/APAC.
• We think the SG digital banking business may add S$0.15/share to SingTel’s SOP valuation, with a further S$0.09/share accretion if it wins in Malaysia too.

Singtel and StarHub top our ASEAN telco ESG rankings

• SingTel (SGX:Z74)/StarHub (SGX:CC3) placed first/second in our ASEAN telco ESG rankings as at end-CY20. While we have not scored NetLink Trust (SGX:CJLU) given its different business nature, we believe it too has no major ESG-related risks.
• In our view, Singapore telcos’ ESG key strengths are in
  1. data privacy/security,
  2. network quality of service/reliability/affordability (“Network”), and
  3. corporate governance/ ethics.
• Board gender diversity, carbon emissions and disclosures can be improved; the latter is in the works for NetLink Trust, which could see its ESG ratings further improving in the coming year, in our view .

[Social] Data privacy & security: Not just a risk but a business opportunity

• For data privacy/security, we rated StarHub slightly ahead of SingTel, due to its fewer major reported data protection incidents, proactive surveillance and transparent/prompt response. While SingTel also has a robust cybersecurity system, two data breaches in 2017-21 led to its lower score (and C+ ESG Combined Score from Refinitiv).
• Meanwhile, both telcos made big investments to beef up their commercial cybersecurity capabilities in the past six years and are well-placed to capture the strong demand in Singapore/APAC. Way ahead of their regional peers, cybersecurity revenue grew to S$564m/S$221m for SingTel/StarHub in CY20 (8%/14% of SingTel SG’s/StarHub’s total service revenue).

[Environmental] Environmental pillar may grow in importance

• Besides telcos’ growing data centre/cloud business, Singapore (SG) set a new national greenhouse gas emission target last year, and in Jul 21 hinted that it may raise the carbon tax (S$5/tCO2e for 2019-23) higher than earlier indicated. Fortunately, Singapore telcos are not big carbon emitters and energy cost is less than 5% of total opex.
• SingTel/StarHub have also embarked on initiatives (e.g. solar power systems for data centres) to limit increases in/reduce emissions (which rose 3%/fell 9% y-o-y in CY20) and taken green loans to align operations towards achieving their sustainable growth goals.
• Carbon emissions rose for SingTel (+3%), but fell for StarHub (-9% y-oy; SingTel sets clearer and more ambitious targets.

[Social] Digital banking may be a value creator for SingTel in the longer run

• While we believe the Grab-SingTel digital bank (GSB) may not be highly profitable in the first 5 years, we think investors will focus on business growth (e.g. deposits, loans) when assessing its valuation. Based on Kakao Bank’s FY22F ( i.e. Year 5 of operations) P/BV of 5.2x (using Bloomberg consensus estimates), we arrive at S$7.5bn equity valuation for GSB by end- CY25F. Thus, based on its 40% stake in GSB, the net equity value accretion to Singtel is S$2.4bn (after deducting its S$600m share of paid-up capital) or S$0.15/share. We think investors may start to recognise this value when GSB reports its operating indicators, possibly during the fully-functioning phase in CY24-25F.
• SingTel, via the Grab-led consortium, is also a front-runner for a digital banking licence in Malaysia to be issued in 1Q22F (may add S$0.09/share to its SOP valuation, based on our estimates).

[Governance] Corporate governance (CG) and ethics

• Singapore telcos are well-governed and recognised for it.
• StarHub leads by a narrow margin in board diversity, but all three companies fared relatively poorly in gender mix. SingTel fared better in keeping to 9-year tenure limit for independent directors in CY20.
• All telcos have structured remuneration to be fair and aligned with stakeholders’ interest.
• Barely any material corruption cases at Singapore telcos.

How do Singapore telcos score under other ESG rating providers?

• StarHub rated highest for ESG by Refinitiv in CY20.
• SingTel ranked first for ESG by S&P Global, followed by a distant StarHub.
• SingTel ranked as a global telco leader by MSCI.
• See the 46-page report attached below for complete analysis on ESG metrics of SingTel StarHub and NetLink Trust.

FOONG Choong Chen CGS-CIMB Research | ONG Khang Chuen CFA CGS-CIMB Research | Andrea CHOONG CGS-CIMB Research | https://www.cgs-cimb.com 2021-10-08

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