• According to data from the Building and Construction Authority (BCA), demand for ready-mixed concrete for the first three months of 2022 was 5% higher than the same period in 2021.
• The price of ready-mixed concrete (RMC) has also risen by 8.4% from Dec 2021 to April 2022 driven by a combination of higher raw materials costs and demand. The average daily charter hire of the Supramax and Handysize has risen from an average US$28,650 per day in 2021 to US$31,150 today.
• Supply-chain disruptions and volatile freight costs continue to hamper growth recovery. We believe the rising cost of RMC is a potential concern, though this is mitigated by the Group’s ability to pass-through these costs to the customer.
• Maintain BUY with higher target price of S$0.68, from S$0.46. We raise FY22e/FY23e earnings by 35%/26% respectively on account of the higher demand for ready-mixed concrete brought about by the construction recovery. Our TP is based on 12x FY22e P/E, a 20% discount to its 10-year historical average P/E on account of the still uncertain business environment.

According to data from the Building and Construction Authority, demand for ready-mixed concrete for the first three months of 2022 was 5% higher than the same period in 2021 (Figure 1). The construction recovery remains on track with progress payments billed for 2021 32.5% higher than 2020 (Figure 2). Contracts awarded for the first three months of 2022 was also 33.2% higher than 2021.

The price of RMC has also risen by 8.4% from Dec 2021 to April 2022 (Figure 3) driven by a combination of higher raw materials costs and demand. The higher cost of its components like sand, freight and bunker fuel cost have all driven up the price of RMC. For instance, the average daily charter hire of the Supramax and Handysize has risen from an average US$28,650 per day in 2021 to US$31,350 today.

The Positives

+ Construction recovery ahead of our expectations; we upgrade forecast of total RMC volume to 13.5mn m3 for 2022 vs. 12.8mn previously. With the construction sector recovering at a faster pace in the first quarter of the year than we expected, we upgrade our forecast of total RMC volume for the year. We expect construction demand to remain robust for the next few years, supported by strong demand for public housing and the backlog of projects from Covid-19 delays. BCA has forecasted annual construction demand of $25-32bn from FY23-26 and these forecast do not include the resumption of Changi Airport T5.

+ Manpower shortage resolved. With Singapore’s borders gradually reopening, work permit holders have returned to the hardest-hit sectors such as construction and marine shipyard. According to the Ministry of Manpower, work permit holders in these sectors now account for more than 90% of pre-pandemic levels. We expect that the manpower tightness at PanU has now been fully resolved and staffing can be ramped up should the Group require it to meet the rising demand in the next few years.

+ Strong operating results to drive Group into net cash position by 1H22e. With the faster pace of recovery in 1Q22, we have revised upwards our forecast for the Group. We now expect PanU to report free cash flows of ~$14mn for 1H22, which will be used to repay down ~$5mn in loans. We expect this to accelerate the Group’s move into a net cash position by 1H22e.

The Negative

– Supply-chain disruptions and volatile freight costs squeeze margins. With the rapidly rising price of RMC, we continue to watch for receivables risk in the sector. GP margin was slightly weaker for 2H21 as raw materials price rose at a faster pace than the average selling price. Apr-22 ASPs are 8.4% higher vs. Dec-21 at S$113/cu m. PanU also faced disruptions in raw-material supplies and had to search for alternatives. Supplies from new sources require lead times of a month for BCA testing before they can be imported. This hampered its ability to fulfil contracts. With coal prices up 135% YTD, we believe cement prices will remain elevated. We believe the rising cost of RMC is a potential concern, though this is mitigated by the Group’s ability to pass-through these costs to its customer and trade credit insurance.

Outlook

Construction sector sees faster pace of recovery in 1Q22; expects escalation of activity for rest of 2022. HDB has announced that it will ramp up the supply of new build-to-order (BTO) flats over the next two years to meet the strong housing demand from Singaporeans. It plans to launch up to 23,000 flats per year in 2022 and 2023, which represents a significant increase of 35% from the 17,000 flats launched in 2021. Minister for Transport S Iswaran also recently announced that Changi Airport’s Terminal 5 project will resume after being put on hold for two years due to the Covid-19 pandemic.

BCA’s forecasts of average construction demand over 2022-2026 of $25-32bn will support construction demand in the next few years.

In the near term, projects in the pipeline that will likely support the group’s growth are the Singapore Science Centre’s relocation, the Toa Payoh integrated development, Alexandra Hospital redevelopment, Bedok’s new integrated hospital, Phases 2-3 of the Cross Island MRT Line and the Downtown Line’s extension to Sungei Kadut.

With an approximately 40% market share in the industry, we continue to see PanU as a key beneficiary of the construction sector recovery. PanU’s batching plants still have capacity to take on a 10-15% increase in RMC demand in Singapore.

Maintain BUY with a higher TP of $0.68, from $0.46.

We raise FY22e/FY23e earnings by 35%/26% respectively on account of the higher demand for RMC brought about by the construction recovery. Our TP is raised to $0.68 from S$0.46 based on 12x FY22e P/E, a 20% discount to its 10-year historical P/E on account of the still uncertain business environment. Stock catalysts are expected from higher contract volumes and better margins.

Source: Phillip Capital Research - 13 Jun 2022

• May 3M-SIBOR was up by 27bps MoM, the highest in 26 months.
• Hong Kong’s domestic loans grew by 1.73% YoY but fell 0.69% MoM in April. Malaysia’s domestic loans growth increased 98% YoY and 0.41% MoM in April.
• Maintain OVERWEIGHT. We remain positive on banks. Bank dividend yields are attractive with upside surprise due to excess capital ratios. Improving economic conditions and rising interest rates remain tailwinds for the banking sector. SGX is another beneficiary of higher interest rates.

3M-SOR and 3M-SIBOR up in May

Interest rates continued to increase in May. The 3M-SOR was up 41bps MoM to 1.47%, while the 3M-SIBOR was up 27bps MoM to 1.21%. The 3M-SOR is 93bps higher than its 1Q22 average of 0.54% and has improved by 120bps YoY. The 3M-SIBOR is 68bps higher than its 1Q22 average of 0.53% and has improved by 77bps YoY (Figure 1).

Five digital banking licenses awarded in Malaysia

Malaysia’s central bank, Bank Negara Malaysia (BNM), announced the five digital banking license winners on 29 Apr. They are Grab Holdings; Sea Group; Malaysian mobile carrier Axiata’s fintech unit Boost Holdings; AEON Financial Service and KAF Investment Bank. BNM has capped the digital banks’ assets at RM3bn (S$0.94bn) during the foundation phase, which could be mid-2026 to mid-2029. This means the total digital bank balance sheets will be less than 1% of the Malaysian banking system. The digital banks are more likely to focus on less capital-intensive areas, like payments and remittances, distribution of third-party investment and insurance products.

OCBC hit with additional S$330mn capital requirement over SMS phishing scam response

The Monetary Authority of Singapore (MAS) has imposed an additional capital requirement of about S$330mn on OCBC for its deficiencies in responding to a wave of spoofed SMS phishing scams in December 2021. The additional penalty will impact OCBC’s CET1 ratio by 0.21%, which would mean OCBC’s CET1 ratio would now be 14.99%. Nonetheless, this would not affect the bank too much as it still has a healthy CET1 ratio, which at 14.99% is still higher than DBS (14.0%) and UOB (13.1%).

Hong Kong loans growth stagnates while Malaysia’s loans growth rebounds in April

Hong Kong’s domestic loans grew by 1.73% YoY but fell 0.69% MoM in April. The MoM dip in loans growth for April was the lowest since Dec 2021 and the YoY loans growth declined by 51bps from March’s loans growth of 2.24%.

Malaysia’s domestic loans growth was 4.98% YoY and 0.41% MoM in April. The increase YoY in April was the highest since Mar 2019 and an increase of 42bps from March’s loans growth of 4.56%, while the increase MoM was a decline of 17bps from March’s loans growth of 0.58%.

Source: Phillip Capital Research - 9 Jun 2022

• Raised $6mn for a 10% stake in Hyphens Pharma digital assets – DocMed Technology.
• DocMed Technology owns POM (B2B digital hypermart) and WellAway (Singapore’s first and only HSA registered e-pharmacy).
• We raised FY22e earnings by 40% to S$9.2mn to incorporate earnings from the acquisition of Novem. Our DCF target price is raised from S$0.345 to S$0.43 due to higher earnings. WACC is increased from 7.3% to 9% from raising our risk-free rate assumption. We upgrade our recommendation from ACCUMULATE to BUY. Hyphens underlying growth strategy is to be a leading portfolio of proprietary skin health products and brands across Asia. Digital healthcare is a new growth and stock catalyst. We have not incorporated the new valuation of DocMed into our target price. We view the transaction as a funding event rather than crystallisation or monetization of Hyphens digital assets. The proceeds have the potential to enhance the B2B platform with more doctors, pharmaceutical companies, transactions and new sources of revenue. Such milestones could drive further rounds of financing and higher valuations.

Event

Metro Holdings Limited will invest S$6mn through new preference shares for a 10% stake in Hyphens wholly owned subsidiary DocMed Technology (DocMed). DocMed owns Hyphens medical B2B hypermart (POM Medical Hypermart) and a licensed e-pharmacy (WellAway).

1. POM is a B2B platform that serves doctor’s drug and other medical supply needs. For instance, a clinic can order and receive all its drugs and supplies from POM. Revenue in FY21 was S$41mn including offline sales.
2. WellAway serves the telemedicine industry as a licensed e-pharmacy. After tele consultation with patients, a doctor will be able to prescribe and arrange delivery of the drugs to their patients through WellAway. Doctors do not need to stock up with multiple and expensive drugs and can tap on WellAway’s extensive range. WellAway supports telemedicine fulfilment needs.

Comment

With the proceeds, DocMed will build up its manpower (technology, operations, marketing) and enhance its B2B platform to serve doctors. The platform can be enhanced with more pharmaceutical offerings, mobile features and a regional footprint across ASEAN. The expected timeline to enhance and expand the B2B platform is two years.

Key operational milestones of the platform will include a larger number of doctors joining and purchasing through the platform. Pharmaceutical companies are constantly looking to reach out and engage doctors. DocMed platforms will be an important platform to showcase their drugs to doctors. In turn, DocMed can generate new sources of revenue such as advertising and promotion from pharmaceutical companies.  

We upgrade our recommendation to BUY with a higher TP of S$0.43 (prev. S$0.345)

Hyphen’s multiple-year growth strategy is to expand its proprietary brands of skincare products (e.g. Ceradan and tDf) across the region. The creation and development of the digital healthcare platform DocMed is an additional growth and share price catalyst. Near-term earnings drivers are the acquisition of Novem and growth in specialty pharma sales due to the return of elective surgeries after the pandemic.

Source: Phillip Capital Research - 6 Jun 2022

• New growth driver from MOBIUS cloud-based banking software. Banking customers can deploy MOBIUS to launch new digital loan and deposit products in a more rapid and targeted manner. Almost RM100mn of orders is expected.
• Silverlake’s recurring maintenance revenue contributed to 72% of FY21 revenue and managed to expand at a CAGR of 4% despite the pandemic.
• Initiate coverage on Silverlake Axis Ltd with a BUY rating and a target price of S$0.38. Our target price is pegged to 20x P/E FY22e. We expect MOBIUS and the recovery in bank IT spending after two cautious pandemic years as key growth drivers for the company. In March 2022, Silverlake initiated an equal access offer at S$0.33 each.

Company Background

Silverlake Axis Ltd provides customized software solutions and core banking systems. It provides digital economy software solutions and services to the banking, insurance, payment, retail and logistics industries. To date, it has been the banking solutions provider for 40% of the 20 largest banks in Southeast Asia. As at Dec 2021, the balance sheet is in a net cash position of RM493mn (S$154mn).

Investment Merits

1. MOBIUS banking platform is the differentiator. Launched in 2020, Silverlake’s MOBIUS cloud banking software allows banks to roll over new digital products in a targeted and timely manner. Banks can utilise the MOBIUS allows banks to co-exist with existing core banking software and propel them to new digital products (Figure 1). Potential uses of MOBIUS include new digital products in credit cards, debit cards, personal loans and deposits. Cloud based software avoids the need for banks to purchase and manage hardware assets. Silverlake recently signed a deal with one of the largest banks in Thailand and is continuing to see increasing inquiries in the region. We expect MOBIUS to generate almost RM100mn of orders over the next two years.
2. Stable recurring revenue despite the pandemic. Silverlake’s recurring maintenance and enhancement revenue contributed to 72% of FY21 revenue and it grew at a CAGR of 4% despite the COVID-19 pandemic (Figure 2). Silverlake’s core banking software (Silverlake Integrated Banking Solution or SIBS) and continuous maintenance and enhancement provide a steady stream of recurring business for the group. SIBS provides core accounting and compliance. With the opening of borders and economies in ASEAN, we should expect Silverlake’s customers to increase their IT spending to accelerate their digitalisation plans to grow.
3. Record order backlog. Silverlake has a long track record and a proven client base in Southeast Asia. 3 of the 5 largest Southeast Asian based financial institutions use its core banking platform, and it has largely retained all its clients since bringing them on board its platform. Silverlake’s project pipeline is healthy, at RM1.7bn, with a record-high order backlog of RM450mn, a 50% YoY increase. This should keep them busy for the next 1 to 2 years. Silverlake is beginning to close more deals and is witnessing an uptick in inquiries about its financial services market solutions and capabilities. Silverlake should be able to secure its foothold in ASEAN and look to expand into other regions.

Revenue

Silverlake has several revenue segments: 1) Software licensing (making up 6% of FY21 revenue); 2) Software project services (11%); 3) Maintenance and enhancement services (76%); 4) Sale of software and hardware projects (2%); and 5) Software-as-a-Service (6%).

Software licensing: Silverlake is a digital economy solutions provider to the financial services, retail, and logistics industries. The group’s main products include Silverlake Axis Integrated Banking Solution (SIBS) and Silverlake Digital Banking MÖBIUS Open Banking Platform (SDE). Revenue from software licensing fell 29% YoY in FY21 as customers continue to be cautious in committing to significant new software licensing deals in the first 3 quarters of FY21. Significant new software licensing deals began to pick up in 4Q21 and it is anticipated that this will continue through to FY22.

Software project services: Silverlake’s software project services business is related to the provision of software customisation and implementation services to deliver the core banking, payment, and retail solutions. Software project services revenue declined 12% YoY in FY21 as several key projects were completed, nearing completion or delayed due to client requests. Nonetheless, the decrease in FY21 was mitigated by smaller scale contracts for SIBS technology refresh contracts secured in Malaysia in 2H20 and new MÖBIUS and banking implementation contracts secured in Sri Lanka, Thailand, and Malaysia in 2H21.

Maintenance and enhancement services: This segment is where Silverlake provides round-the-clock software support services as well as enhancement services to support its customers in the delivery and execution of their strategies in making available new capabilities to them. These capabilities can be in the areas of new channels, to augment customer experience and address any new regulatory and emerging governance, risk, and compliance requirements. This segment recorded a growth of 10% YoY in FY21 due to new maintenance contracts secured as well as revision of maintenance fees for existing contracts.

Sale of software and hardware projects: This refers to Silverlake’s non-proprietary software and where its acts as a reseller to customers who require bundled one-stop solutions. The Group is an authorised reseller of IBM hardware and system software in Malaysia. Hardware sales are seasonal by nature and dependent on the requirements and specifications to support the implementation of new or enhancement of existing systems. This segment declined by 60% YoY in FY21, and the lower sales were due to the deferment of capital expenditure during the pandemic period as well as they wait for the launch of the latest IBM iSeries in September 2021.

Software-as-a-Service: This segment consists of insurance processing, where Silverlake’s Merimen built platform processes insurance claims and premiums, and retail, and where Silverlake is a cloud-based SaaS solution provider in the retail industry. Software-as-a-Service revenue for Insurance processing was flat in FY21 while Retail processing grew 47% YoY in FY21 as the Group pivots to SaaS offerings to the larger SME market.

Expenses

The cost of sales fell 12% YoY in FY21, which was in line with the drop in revenue. Operating expenses include selling and distribution costs (15% of total operating expenses), administrative expenses (79%) and finance costs (6%). Selling and distribution costs fell 9% YoY in FY21 as a result of cost control measures during the pandemic period. Selling and distribution costs include staff costs and Silverlake has a total of 2,076 employees in FY21. Expense categories remain largely unchanged over the last 3 years. Notably, Silverlake spent 4% of FY21 revenue (~RM25mn) on research and development.

Margins

Gross profit margin improved from 57% in FY20 to 60% in FY21 mainly due to better margins generated from software project services as well as maintenance and enhancement services in FY21.

Net profit margin fell from 28% in FY20 to 23% in FY21 mainly due to non-operational losses of RM15.6mn and RM8.6mn from remeasurement of put liability for put option and remeasurement of derivative asset in relation to call option on the remaining 20% equity interest in XIT Group respectivly.

Balance Sheet

Assets: Cash and bank balances fell by 16% in FY21 to RM417mn mainly due to the full repayment of their revolving credit line and the cash payment for the acquisition of SISG Group. Intangible assets grew 6% in FY21 to RM317mn mainly due to the capitalisation of software development expenditure incurred on core and digital banking, Fintech and other solutions during the year.

Liabilities: Total liabilities fell 57% in FY21 to RM310mn mainly due to the settlement of the EOC for the acquisition of SISG Group and the full repayment of revolving credit line mentioned above. We expect total liabilities to remain stable as the revolving credit facility has been cancelled.

Cash Flow

Free Cash Flow (FCF) fell 10% in FY21 to RM155mn as operating cash flow fell 6% in FY21 to RM197mn. FCF averaged RM206mn for the past three years. Capital expenditure (CAPEX) fell 10% in FY21 to RM44mn with majority of CAPEX concentrated in Southeast Asia (95% of total CAPEX). Nonetheless, we expect FCF to improve as operating cash flow should increase with the increase in revenue.

Business Model

Silverlake’s primary business is the development of core banking and payment processing technologies. The company also makes money from the license fees for its corporate software platforms. Following the completion of projects for customers, Silverlake gets contracts for maintenance and enhancement services, which pay a recurring fee. The maintenance and improvement services are normally recurring for a period of five years and are strongly tied to the installed base of its core banking system.

Silverlake’s recurring revenue from maintenance and enhancement services makes up the bulk of revenue, at 76% of FY21 total revenue. Nonetheless, it has expanded its services, primarily through acquisitions, to provide digital transaction processing in other industries such as retail and insurance.

Silverlake’s flagship product, the core banking system Silverlake Axis Integrated Banking Solution (SIBS), runs primarily on the IBM AS400 (Power Systems) Platform. SIBS offers the full range of commercial banking functions including financing (loans), funding (deposits), remittances, a general ledger module and the Customer Information Facility (CIF). Over the years, Silverlake has broadened its platform capabilities to include a credit card system, internet banking, trade finance, and treasury solutions.

Silverlake has also introduced its Open Banking Platform, MOBIUS, which combines customer-facing digital capabilities with core banking processing capabilities, i.e., SIBS, to create a digital, unified, open end-to-end platform for commercial banking. This means customers can expand their core banking platforms to the MOBIUS platform, thus integrating their systems into one end-to-end banking platform. Furthermore, MOBIUS can be integrated across different core banking systems, without the need to switch to SIBS. Silverlake is able to target both new and existing customers. With MOBIUS being a cloud-based system, the cost is lower than traditional systems which are usually on-site platforms.

Industry

Core banking is evolving to meet the challenges of significant shifts in the banking industry, especially in digital banking. It is essential to provide enabling technologies that increase business agility and reduce operational costs in order to adapt to these changes.

An increasing number of banking segments and geographies are implementing cloud-only core banking system (CBS) strategies. Gartner estimated that 6.5% of core banking commercial off-the-shelf (COTS) CBS installations ran from the cloud in 2020, and this percentage is predicted to increase to 10% by 2023 when public cloud usage will equal private cloud at 5% each. The increased agility and operational excellence that cloud technology may provide to CBS installations have been the main drivers for this rise. Silverlake is able to offer these services with its MOBIUS platform.

Banks are also keener on buying their software, rather than building it. Purchasing software rather than producing it can be more convenient because it eliminates the need for the bank to maintain a software house with current skills and capabilities. The majority of banks with proprietary CBS aim to replace it with COTS applications. This deliberate choice leads to the need to select reliable suppliers that can quickly deploy the CBS, as well as maintain it in the after-sales process.

CBS’s services are moving away from being isolated islands of functionality and toward becoming open, collaborative platforms. Banks are rethinking many parts of their business models as a result of digital business, and ecosystems are critical to this. With a digital business, banks can expand their digital business platform model options, connect to new sales channels, boost the variety and value of client interactions, and link to new sales channels.

Gartner notes that the number of net new deals for core banking replacement increased in 2021, despite the COVID-19 pandemic. There is a growing demand for core banking renewal, driven mainly by digital banking initiatives for which legacy systems prove to be inadequate.

According to Gartner, there are four market leaders. Gartner’s Magic Quadrant analysis identified four leaders in the CBS industry. However, vendors whose offerings do not fit Gartner’s stated criteria, such as Islamic banking vendors, are excluded from this research, which is why Silverlake was left off the list.

The analysis’ main thesis is that this is a highly competitive field dominated by four big corporations. These four companies have a worldwide installation base of between 400 and 800 users. Silverlake, on the other hand, has between 70 and 80 installations worldwide, mostly in Asia.

Market leaders highlighted by Gartner:

• EdgeVerve Systems (Banking platform: Finacle) – ~500 installations worldwide
• Oracle Financial Services Software (FLEXCUBE) – ~800 installations worldwide
• Tata Consultancy Services (BaNCS) – ~400 installations worldwide
• Temenos (T24) – ~800 installations worldwide

Risks

1. Slowdown in spending. A weakening economy could create potential headwinds for spending among banks, which are Silverlake’s main customers. Financial shocks would hit IT spending the first and the banks would cut back. However, Silverlake’s main market is in ASEAN, which is aggressively reopening economies. Companies looking to recover post-lockdowns would need to accelerate their digitalisation efforts to grow.
2. Increasing competition. While Silverlake is the banking solutions provider for 40% of the 20 largest banks in Southeast Asia, it is relatively small compared to the global players in the industry. These global players have gained contracts in Malaysia and Southeast Asia, a trend that is expected to continue as key banking systems reach the end of their life cycle in the coming years.

Valuation

We initiate coverage on Silverlake Axis Ltd with a BUY rating and a target price of S$0.38. Our target price is pegged to 20x P/E FY22e. It is an 11% upside to peer valuations of around 18x PE (Figure 7).

Our target PE of 20x is 15% higher than the historical average PE of 17.5x. In our view, Silverlake should trade at a higher premium to its historical PE with the introduction of MOBIUS and resumption of bank IT spending post pandemic.

Source: Phillip Capital Research - 6 Jun 2022

• FY22 revenue met our expectations at 101% of FY22e estimates. EBITDA was 93% of estimates due to lower-than-expected NBN migration earnings.
• 2H22 EBITDA was down 5% YoY, the largest drag from NCS and widening losses in Trustwave. Underlying PAT in 2H22 was up 15% excluding exceptional items, NBN and job support scheme.
• We lower our FY23e forecast by a modest 2% to account for weaker enterprise earnings. Our SOTP TP is raised from S$2.86 to $3.05 as we roll over our EV/EBITDA into FY23e and higher associate market valuations. Earnings in FY23e are expected to recover as roaming revenue creeps up and economic conditions improve in emerging countries post lock-down. The targeted monetization of around S$3bn assets will help narrow the valuation discounts for associates, strengthen the balance sheet and improve the capacity to raise dividends. Some of the assets identified for recycling of capital include disposal of Amobee, redevelopment of Comcentre and possibly part disposal of associate stakes. We maintain our ACCUMULATE recommendation.

The Positives

+ Improving earnings in Australia. Mobile service revenue rose 4% YoY to A$1.84bn, supported by both ARPU and subscriber growth. Optus mobile plans are gaining traction with customers for their more differentiated offering in terms of 5G speed, on-demand product features and improvement in customer service levels. Total consumer revenue in Australia declined due to a drop in NBN migration revenue (-83% YoY) and slower equipment sales (-25% YoY).

+ Huge reversal in Bharti earnings. The growth in earnings was driven by a 23% rise in  ARPU and a 12% increase in 4G subscribers in India. Airtel Africa also delivered a 24% improvement in EBITDA through subscribers (+9%) and ARPU growth (+11%).  

The Negative

– Sluggish enterprise and NCS earnings. EBITDA fell 4%, dragged down by a 14% drop in fixed voice revenue and 3% fall in leased circuits and broadband. Excluding JSS, NCS recorded a 4% rise in EBITDA. Margins were softer due to a 19% YoY rise in staff costs.

Outlook

Key drivers to earnings recovery in FY23e are 1) Roaming revenue in Singapore consumer and enterprise; 2) Organic and inorganic growth in NCS; 3) Economic recovery post-lockdown in emerging markets of Thailand, Philippines and Indonesia; 4) Improving ARPU in India and rising data traffic.

Source: Phillip Capital Research - 30 May 2022

• FY21 revenue and EBITDA were within expectations, at 101/103% of our FY22e forecasts. 4Q22 revenue was flat and EBITDA up 3% YoY excluding write-offs. 2H22 DPU improved a modest 0.8% YoY to 2.57 cents.
• Residential fibre connections increased by 6,244 during the quarter. The annualised run-rate of residential connections is around our modelled 25,000 connections per annum.
• A regulatory review of fibre prices is underway. New fibre prices are to be implemented on 1 January 2023. Compared with five years ago, the regulated asset base is higher. However, the number of residential connections is one-third higher. Our forecast assumes no change in tariffs. We have kept our FY23e forecast intact.  Our NEUTRAL recommendation and DCF target price of S$0.96 is maintained.

The Positive

+ Recovery in residential connections. During the pandemic, residential connections were around 15k in 2021. We have seen a significant recovery in connections, back to an annualised run-rate of 25k-26k. The lifting of COVID-19 restrictions is improving the construction of new residential homes.

The Negatives

­– Ducts and manholes see multi-quarter decline.  The weakest revenue segment has been the 3% reduction in duct and manhole revenues. Major customer Singtel will see less use of the ducts for their copper lines.  

Outlook

The upcoming regulatory review will determine the residential tariffs for the next five years. Factors considered will be WACC, size of the regulated asset base, future capital expenditure and the number of connections. Our model assumes no change in tariff. Nevertheless, lower tariffs may impact cash available for distribution. However, there are other levers to maintain near-term dividends such as higher borrowings or lower capital expenditure.

We maintain our NEUTRAL recommendation with an unchanged TP of S$0.96

We expect distribution per unit to be stable. The continuous rise in interest can taper the attractiveness of the distribution as earnings growth will be limited.  

Source: Phillip Capital Research - 24 May 2022