SingTel - UOB Kay Hian 2022-04-12: Repositioning NCS For Regional Growth

SINGTEL (SGX:Z74)

SingTel - Repositioning NCS For Regional Growth

We came away from a recent NCS meeting more sanguine on its near-term prospects. We expect NCS to deliver double-digit revenue growth as it focuses on driving digital services within the government and telecommunications sector. Its recent acquisition in Australia paves the way for NCS to enter Asia Pacific’s third-largest ICT market, after Japan and China.
It is still too early to monetise NCS as it is on the cusp of ramping up its business.
Maintain BUY rating on SingTel. Target price: S$2.90.

In aligning SingTel (SGX:Z74)’s strategic roadmap, NCS has been identified as a pillar of growth where its ROIC is expected to exceed the company’s cost of capital via robust top-line growth and a focus on government, enterprise and telco sector jobs (leveraging on SingTel’s expertise and associates’ relationships in the region).
In tandem with smart capital recycling, SingTel has recently monetised a 1.6% stake in Airtel Africa for S$150m to support the future of NCS and regional data centres.

We came away from a recent meeting with NCS more sanguine on its near term prospects. For a start, NCS’s CEO continues to see strong demand for digital (ie data analytics, artificial intellegence), cloud, platform (IoT) and cyber services. This is expected to drive high double-digit revenue growth for FY23, aided by the consolidation of Dialog and ARQ group in Australia.
NCS booked S$1,692m of orders and registered segment revenue and digital revenue of 8% y-o-y and 27% y-o-y respectively in 9MFY22.

In essence, NCS’s growth will come from:
1. organic – digital services are trending well with reasonably strong underlying demand from the enterprise segment,
2. inorganic – the acquisition of Dialog and ARQ in Australia is important as it allows NCS to compete in the Tier 1 league for Australia, and
3. synergies in terms of cross-selling, upselling and cost optimisation.
We note that the recent acquisitions were priced within industry range of mid-teens EV/EBITDA with reputable clients. NCS is also currently assessing synergistic opportunities with Optus enterprise.
Key focus markets for NCS are:
1. Australia – being the third largest ICT market in Asia Pacific after Japan and China,
2. Greater China – fastest growing country with good demand, and
3. Southeast Asia – leveraging on associates’ links and NCS’s Singapore presence.

SingTel's management believes it is likely too early to monetise NCS as it is currently on the cusp of earnings ramp-up against a backdrop of:
1. recent acquisitions in Australia, and
2. strong underlying demand for digital services.
We do not discount the potential monetisation/listing of NCS, albeit beyond the next two years.

SingTel's management shared that talent is an important success factor for NCS. The acquisition of Dialog and ARQ will add 1,900 skilled talents to NCS. In this context, ARQ has an academy with a very good track record in acquiring and retaining talent/human capital. NCS hopes to benefit from this.
Additionally, NCS is currently looking to ramp up headcount in India as its offshore delivery centre. At this juncture, there are about 300-400 staff in India but this number will grow to 1,000 in the next three months.

SingTel's management expects 2HFY22 dividend to be at the upper range of its 60-80% dividend payout policy, mirroring the absolute dividend amount of 1HFY22. We have forecasted dividend of S$0.095 for FY22. This will translate to a dividend yield of 3.6%.
Maintain BUY rating on SingTel with an unchanged DCF-based target price of S$2.90 (discount rate: 7%, growth rate: 1.5%). At our target price, the stock will trade at 13x FY23 EV/EBITDA (its 5-year mean EV/EBITDA).
See
Key re-rating catalysts include:
- successful monetisation of 5G,
- faster-than-expected recovery in Optus' consumer and enterprise businesses, and
- market repair in Singapore and resumption of regional roaming revenue.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-04-12

SGX Stock Analyst Report BUY MAINTAIN BUY 2.900 SAME 2.900