• SingTel (SGX:Z74)’s recent investor day (SID 2022) offered insights on operational targets, NCS, and its regional data centre (RDC) plans.
• Price and market repair are near and mid-term catalysts, with enterprise and regional data centre as longer-term drivers.

• SingTel remains our preferred SG telco pick.

SingTel Reaffirmed Its High Single-digit ROIC Target (FY22: 5.4%)

• SingTel's 5G and growth capex has been sufficiently met via proceeds from its asset recycling programmes ( >S$3.5bn raised to date) with a buffer for dividends. While there is no outright net debt/EBITDA target (FY22: 1.7x), it would look to further debt refinancing when the opportunity arises.
• SingTel’s investments and/or stakes in associates will be guided by ROIC (return of invested capital) and growth prospects of the markets.

Price and Market Repair

• A stronger recovery in mobile revenue is a foregone conclusion, with roaming revenue at 46-50% of pre-pandemic levels in 1QFY23 in Singapore and Optus (recovery at 90% by end-FY23).
  • For Singapore, SingTel believes a sensible move would be for the industry to raise prices, given inflationary pressures. The launch of its hybrid/challenger prepaid brand (Heya at S$10 per 100GB data) is timely, considering the target market of migrant workers (85% of pre-pandemic levels), value seekers and capitalising on rising 5G take-up (480,000, 12% of overall base).
  • Optus notes the tier-2 market ( >40 mobile virtual network operators) still saw fierce competition, notwithstanding the market price repair.
  • Meanwhile, Bharti expects ARPU to reach INR300 by end-FY23F (1QFY23: INR183) on further price repair and data uplift, with downside risks from a slower-than-expected migration from feature phones to smartphones as a result of macroeconomic headwinds.
  • AIS sees good potential to take market share, as its peers are distracted by the merger.

Scaling Up Enterprise and Regional Data Centre

• The continued scaling up and investments in staffing will see enterprise headcount grow from 12,000 to ~20,000 (across the Asia-Pacific), albeit at the expense of EBIT in the medium term (1QFY23: -25% y-o-y).
• NCS is targeting S$5bn in revenue by FY26 (FY22: S$2.4bn) or a 21% CAGR, with 40% made up of enterprises/non-government. This is to be achieved via:
  1. End-to-end service offerings including digital services,
  2. a shift away from public sector deals, and
  3. doubling down on ex-SG markets (1QFY23: 11%).

SingTel - Valuation & Recommendation

• Key risks are competition across Singapore, Australia, Thailand, Indonesia and India (Airtel), 5G monetisation challenges and weaker-than-expected earnings.

• Maintain BUY recommendation on SingTel with SOP-based target price of S$3.55, 33% upside with ~5% FY23F (Mar) yield.
• Our Target Price for SingTel includes a 12% ESG premium, with 20% of top management incentives tied to ESG KPIs.

Source: RHB Invest Research - 7 Sep 2022