NETLINK NBN TRUST (SGX:CJLU)
SINGTEL (SGX:Z74)
STARHUB LTD (SGX:CC3)
Singapore Telecom Sector - Postpaid Uplift To Drive Service Revenue For 2022
- The sector’s 2021/9MFY22 earnings came in within expectations, improving 11% y-o-y on the back of stronger postpaid revenue, strong SingTel associate contribution, enterprise growth at StarHub and good cost discipline.
- We expect 2022’s earnings to grow 15% y-o-y amid high single-digit service revenue growth and SingTel’s associate recovery.
- Maintain MARKET WEIGHT. We like SingTel and NetLink Trust and for defensiveness, NetLink Trust offers a 5% dividend yield.
2021 characterised by encouraging postpaid revenue and cost discipline.
- The telecommunications sector’s 2021/9MFY22 earnings came in within expectations, recording a net profit growth of 11% y-o-y to S$1,683m. This was driven by:
- postpaid revenue uplift,
- strong associates’ contribution (turnaround in India) in SingTel (SGX:Z74),
- StarHub (SGX:CC3)’s strong enterprise revenue with better performance from Ensign and the consolidation of Strateq,
- NetLink Trust (SGX:CJLU)’s stronger non-building address points (NBAP) connections, and
- good cost discipline.
- Telcos also experienced nascent recovery in roaming revenue with the reopening of cross-border travel, especially to Malaysia. This helped to partly drive the sector’s 4Q21 service revenue.
2022 outlook: A high single-digit revenue growth to help offset inflationary pressure.
- After the results, we trim earnings by 1%. We now project net profit of S$2,254m for full-year 2022/2023, representing a 15% y-o-y growth.
- Stepping into 2022, SingTel remains encouraged by the postpaid trajectory seen in Singapore and Optus while being cautiously optimistic about its associate investments in India, Indonesia and Thailand.
- StarHub guided for a robust 10% y-o-y service revenue growth but EBITDA will be adversely impacted by inflationary pressure (higher utility) and upfront investment for IT transformation. StarHub expects margin to recover from 2023 onwards (to at least 23% from 20%).
- Similarly, NetLink Trust expects operational inflationary pressure to materialise in 2022, including higher interest rates in the rising rate environment.
5G ARPU uplift lifted postpaid service revenue…
- Notably, we continue to see stable mobile service revenue among the incumbents’ telcos (SingTel, StarHub, M1), where 5G handset-bundle plans were first rolled out in Dec 20.
- Telcos have been reporting good take-up rates, as smartphone users are embracing 5G to improve user experience with mobile applications. This was evidenced in the higher postpaid average revenue per user (ARPU) trend in both SingTel and StarHub, which offset the dilution from SIM-only plans. In 4Q21, postpaid revenue rose 5% y-o-y and 4% q-o-q thanks to a 5% y-o-y increase in postpaid subscribers and a 2% y-o-y increase in ARPU.
…while competition remains benign with 5G product differentiation.
- Meanwhile, we believe the competitive landscape in the Singapore market will remain rational into 1H22. We note that incumbent telcos have remained unfazed by price competition in the past two quarters. Based on the SIM-only price plans we tracked, Mobile Virtual Network Operators’ (MVNO) have not been aggressive in cutting prices or hiking data quotas for free in the past quarters. This suggests incumbents’:
- own MVNO offerings, ie GIGA and GOMO are defending their market share in Singapore, and
- ability to differentiate the premium product via availability of 5G services.
- We expect GOMO to mirror GIGA’s positive subscriber growth trend.
Cementing 5G coverage in Singapore.
Key risk to TPG as Singapore’s third 5G provider.
- Naturally, if TPG decides to roll out its own 5G SA network in Singapore, we expect to see heightened competition. This outcome may see continuous erosion of ARPU and and return on invested capital (ROIC) for the incumbents. This will displace our expectation of a market repair for the Singapore market, as competition has been rather benign in the past seven months in Singapore.
- At this juncture, we see SingTel and StarHub reporting encouraging 5G plan take-ups. This helps to offset ARPU dilution from SIM-only plans.
Singtel (SGX:Z74): Value creation via strategic reset on track to shape a green regional data centre with S$8b valuation.
- At our target price, SingTel will trade at 14.5x FY23F EV/EBITDA (slightly above its 5-year mean EV/EBITDA). The stock currently trades at -1 standard deviation below its five-year mean EV/EBITDA of 13x.
- SingTel is on track to deliver growth for shareholders via its strategic reset. The focus will include:
- capitalising the digital/IT growth trend via strategic partnerships,
- leveraging its infrastructure assets (data centres, towers and fibre) to unlock value,
- sweating its key assets, and
- investing in 5G for network superiority and future monetisation.
- This is expected to help SingTel bridge the current market valuation gap as a conglomerate.
- To capitalise on the accelerating data centre growth trend (5-year CAGR of 18% over 2020-25), SingTel entered into MOUs with Thailand Gulf Energy and Indonesia’s PT Telkom to develop data centres in Southeast Asia. Currently, SingTel has seven data centres in Singapore with 70MW capacity. The goal is to add another 100MW of capacity to SingTel’s data centre portfolio over next 3-5 years. This will create a data centre asset close to S$7-8b within five years.
- Debt will remain well capped, based on management’s guidance of S$10m/MW capex requirement. SingTel recently announced that they are building a 30MW integrated cable landing station and data centre in Singapore with funding being currently worked out with potential investors. The partnership with Gulf is seen as complementary to SingTel given Gulf’s power asset business (security of power supply being an integral part of data centre) and influence in the society.
- See
NetLink Trust (SGX:CJLU): A defensive shelter.
- We continue to see NetLink Trust as a good shelter amid market volatility given its strong earnings visibility, healthy balance sheet and cautious approach in terms of overseas/domestic acquisitions.
- Key catalysts include:
- growth in demand for NBAP connections with the rollout of 5G/Smart Nation initiatives,
- investors seeking defensive yield from NetLink Trust’s resilient, predictable, transparent and regulated cash flow, and
- earnings-accretive M&As.
- Key event to watch out for: regulatory review for 2023, expected to be announced by 4Q22.
- See
Maintain MARKET WEIGHT
- Maintain MARKET WEIGHT as the sector currently trades at 12.6x EV/EBITDA 1 standard deviation below its 5-year mean EV/EBITDA). Earnings recovery is more visible, given the benign competitive landscape and nationwide 5G rollout helping the incumbents sustain market share. Pronounced earnings uplift from the enterprise business may take a longer time to bear fruit as telcos continue to explore new business applications for 5G.
- Our top pick is SingTel as it is a proxy to:
- economic reopening in Southeast Asia, and
- monetisation of assets to narrow the valuation gap, including setting up a regional data centre and potentially, a regional digital banking outfit in Southeast Asia.
- Read also recent reports:
- SingTel is also one of the UOBKH's Singapore stock alpha picks for March 2022. See report: Singapore Stock March 2022 Alpha Picks - Switch Out Wilmar For Bumitama, Drop Lendlease REIT & Add CapitaLand
Chong Lee Len
UOB Kay Hian Research
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Chloe Tan Jie Ying
UOB Kay Hian
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https://research.uobkayhian.com/
2022-03-09
SGX Stock
Analyst Report
1.050
SAME
1.050
2.90
SAME
2.90
1.300
SAME
1.300
