• SingTel (SGX:Z74)'s 1QFY23 PATMI of S$628m (+41% y-o-y) is in line with MIBG and consensus expectations, accounting for 25% of full year estimates.
• Headline growth was lifted by improved operational performance and exceptional gains from Airtel (+144% y-o-y) and dilution of the group’s effective shareholding in Australia Tower Network.

Earnings Stayed Resilient

• SingTel’s operating revenue and EBITDA in 1QFY23 fell 5.6% and 2.0% y-o-y, respectively, due to the absence of NBN migration revenue and contributions from Amobee which was classified as a ‘subsidiary held for sale’ in March 2022, coupled with a 4% weakening of the Australian dollar.
• Conversely, EBIT (before associates’ contributions) rose 5.2% y-o-y as
  1. deconsolidation of Amobee and depreciation charges fell after the sale of ATN towers,
  2. roaming rebound from the broader relaxation of COVID-19 restrictions in Singapore, and
  3. improved mobile performance and satellite equipment sales in Australia.

A Confluence of Catalysts in FY23

• We forecast SingTel would deliver 3-year earnings CAGR (FY23-FY25F) of 15%. This reflects monetization of 5G in Singapore and Australia, potential divestment of Trustwave, double-digit NCS growth and regional associates benefitting from economic reopening.
• A regional data centre is also shaping up as SingTel aims to add another 100MW of capacity within 3-5 years to build a DC portfolio with S$8b valuation.
• Notably, Optus recently announced legacy price plan hikes of AUD4/month to adjust for inflationary pressure. This effectively lifts ARPU by 7-10% for SingTel’s Australian consumer mobile business. We expect improve mobile service EBIT (+5.6% y-o-y) and EBITDA margin growth (+2.8pp y-o-y) in FY23.

Prospects Remain Bright

• Amid rising interest cost and intense competition, SingTel has begun its growth journey while shareholders. Core business segments in Singapore and Australia are gradually recovering following the resumption of foreign travel.
• Rising contribution from associates will further support earnings growth, making SingTel an exciting stock that offers a better mixture of growth (+15% y-o-y) and dividend yields above 4% in FY23-FY25E.

SingTel - Valuation & Recommendation

• We believe SingTel's FY23 earnings will benefit from the following areas:
  1. Reallocate capital by divestment of assets.
  2. Developing regional data centre with valuation of US$8b.
  3. Expansive 5G coverage should spur adoption.
• Our FY23-25F forecasts for SingTel’s core business are unchanged, but we raise our SOTP-based target price by 4% due to higher valuations for associate businesses.
• We reiterate BUY on SingTel, which is our top sector pick.

Source: Maybank Research - 24 Aug 2022