• Keep BUY and SOP-based TP of SGD3.55, 35% upside with c.5% FY23F (Mar) yield. Singtel’s 1QFY23 results came in light but earnings should pick up momentum in 2H22. We see a further improvement in roaming traffic and prepaid sales, from higher tourist arrivals alongside stronger enterprise contributions. Singtel remains our preferred telco pick on its positive earnings execution and the unlocking of latent value from asset monetisation exercises. A 6% ESG premium imputed into our TP reflects the group’s leading ESG traits.

• Earnings momentum to pick up further. 1QFY23 underlying earnings ticked up 6.6% QoQ (+10.6% YoY), as higher EBITDA and associate contributions (mostly Bharti) more than offset the increase in financing cost. The quarter saw the deconsolidation of Amobee’s losses (in the process of being divested), which is EBIT-positive. While core earnings came in light (RHB/consensus: 20%), we see further earnings improvements ahead, on: i) Higher roaming revenue, ii) positive impact from Optus’ repricing (early- Aug), iii) rising share of associates (Bharti), and iv) sale of non-core assets.

• Mobile up strongly following the recovery in roaming traffic from reopened borders. Singapore mobile service revenue (MSR) posted the highest growth since the onset of the pandemic, up 11% YoY (+10% QoQ) in 1QFY23. This was ahead of StarHub’s (STH SP, NEUTRAL, TP: SGD1.20) +3.8% YoY (+0.1% QoQ). Consequently, consumer EBITDA surged 11.4% YoY (+30% QoQ). Despite the stiff competition, Optus’ MSR advanced 2.4% YoY (+1.5% QoQ) as the Choice plans continue to resonate well with customers, alongside higher roaming revenue.

• Enterprise/NCS still in investment mode. NCS’ EBITDA continued to be weigh down by investments to shore up its capabilities and higher staff cost, notwithstanding the good 13% YoY growth (-14% QoQ on seasonality). Management is vying for SGD5bn (21% CAGR) in revenue by FY26F – of which 40% would come from enterprise customers (FY22: 28%) (vs the current dominant government/public sector clientele). This would be mainly fuelled by the acquisitions in Australia (Dialog and ARQ).

• Capital recycling. Singtel has raised over c.SGD2.3bn (excluding the recent disposal of Globe Telecom’s towers) from the disposal of non-core assets over the past year. The proceeds of these sales are being channelled towards 5G, new investments in enterprise (regional data centers, new markets outside of Singapore) and, to some extent, digital banking. We see its loss-making cyber-security outfit, Trustwave (TW) as the next in line to be monetised (carrying value of SGD695m).

• Key downside risks are competition in the domestic and Australian mobile markets, weaker-than-expected earnings and execution of its strategic business reset.

Source: RHB Research - 25 Aug 2022