• Keep BUY and SOP-based TP of SGD3.15, 34% upside with c.6% FY25F (Mar) yield. We detected a more cautious tone from management following the revelation of sizeable non-cash impairments to be booked in 4QFY24. Singtel will elaborate on its “refreshed” enterprise strategy post FY24 results. Its 3-year cost-out programme (SGD600m) and focus on new growth engines should lift ROIC to the low teens by FY26F. Singtel remains our preferred sector pick.

• SGD3.1bn non-cash impairments (includes SGD2bn goodwill impairment at Optus) couched with Australia’s TPG Telecom (TPG) network-sharing deal. Singtel hosted a call yesterday on the multi-operator core network (MOCN) deal between Optus and TPG, and the significant asset impairments to be reflected in 4QFY/FY24 (results out on 23 May). We sense a more cautious tone from management with structural issues at play and the weak macroeconomic environment plaguing the Australian enterprise business. Meanwhile, Optus’ consumer business continues to trend well on industry price repair. In our view, the write-down on NCS Australia (SGD280m) is a negative surprise, as it was a newish set-up and constitutes a key growth engine. Singtel has confirmed that it is on track to pay dividends at the higher end of its 70-90% DPR guidance – a key re-rating catalyst, in our view.

• Higher cost of capital and interest rates Down Under. Singtel will write off SGD2bn in Optus goodwill as the recovery value has fallen below the carrying value in its books due to the higher cost of capital and interest rates. While the goodwill outstanding (post write-down) is around SGD5.9bn, the carrying value of the Optus investment has not been disclosed. Optus will book an AUD540m (SGD470M) impairment related to its enterprise network assets while the Asia-Pacific cyber-security business and NCS Australia will see combined impairments of SGD620m. We gather the rescaling of Optus’ enterprise cost base has re-positioned its enterprise business on a more sustainable footing.

• Strengthening its regional Australia network. We view the MOCN deal positively as active sharing typically invokes good capex and opex savings with the elimination of network duplication. Optus gains from having access to TPG’s spectrum in the regional areas with capex avoidance. TPG can capitalise on Optus’ accelerated 5G rollout, potentially hitting 2,444 regional sites by 2030. This is on top of the wholesale revenues from TPG totalling AUD1.6bn over 11 years (renewable thereafter), providing incremental FCF of AUD900m over the same period. Optus expects capex intensity to moderate to the mid-teens level in 2-3 years (FY24F capex guidance of AUD1.5-1.6bn) with c.AUD200-300m in savings and 5G capex tapering off.

• Key downside risks are competition across its mobile footprint, weaker-than- expected earnings and negative regulatory developments

Source: RHB Research - 30 Apr 2024