SingTel - Driving Return on Invested Capital (ROIC) Higher

Date: 06/09/2022

Source  :  Maybank Kim Eng
Stock  :  Singtel       Price Target  :  3.15      |      Price Call  :  BUY
        Last Price  :  2.50      |      Upside/Downside  :  +0.65 (26.00%)

Data centers and IT services to help drive growth

We attended the recent Singtel Investor Day where management re iterated its commitment to improve Return on Invested Capital (ROIC) to high single-digits in the mid-term (FY22:5.4%) by: a) delivering on enterprises’ 5G innovation for monetisation, b) capturing growth opportunities in data centres (DCs) and IT services as enterprises increase spending on digitalisation, and newly launched GXS bank, C) leveraging on positive price momentum in India, Indonesia and Australia to grow ARPU and d) unlocking value from asset recycling and capital partnerships to fund growth investment.

Regionalising NCS

Following 3 levers of growth (client industries, services and geographies) and expanding into Australia through recent acquisition, NCS targets to improve its revenue from FY22’s SGD2.4bn to SGD5bn by FY26E. To achieve this, NCS plans to expand its regional talent pool from 12k to 20k within 4 years. The additions will mainly come from lower cost locations (i.e. Vietnam and India). We expect NCS EBIT pressure will likely persist for the next 1-2 years due to rising talent cost and impact cost of recent acquisitions in Australia.

Attractive opportunity in Data Centre

SingTel aims to build-up its Regional Data Centre (RDC) platform capacity by 4-fold to more than 220MW (including JV Co capacity) across Singapore, Thailand, and Indonesia in the next 3-5 years where there is highest demand and growth. It is also looking for suitable partners to expand into other ASEAN countries (e.g. Malaysia, Vietnam). It expects healthy RDC EBITDA margin of ~50%, even outside of Singapore.

Sustaining shareholders value

Singtel remains comfortable with its current net debt/ EBITDA (1QFY23: 1.6x), while proceeds from announced asset recycling programme ~SGD6b would fully cover incremental 5G capex and growth initiatives over the next few years. Hence, we think it will be able to pay FY23-25E dividends at the top-end of its 60-80% payout policy. Re-iterate BUY with an SOTP based TP of SGD3.15. Singtel is our Top Pick among Singapore telcos.

Source: Maybank Research - 6 Sept 2022

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