Singapore Telecommunications
Analysts keep ‘buy’ calls despite impairment news
Despite recent news on Singapore Telecommunications (Singtel) booking an impairment of $3.1 billion for its upcoming FY2024 ended March 31, analysts are remaining upbeat on the stock and keeping their “buy” calls.
Singtel, on April 29, announced that it expects to recognise a $3.1 billion non-cash impairment in FY2024, mainly from Optus, which is the telco’s Australian business. Singtel expects to record non-cash impairment provisions of approximately A$540 million ($470 million) on Optus’ enterprise fixed access network assets, non-cash impairment provision of approximately $2 billion on the goodwill of Optus, as well as non-cash impairment provision for the goodwill of approximately $340 million for the Asia Pacific cyber security business mainly from general business weakness on lower corporate spending. In addition, an estimated $280 million of non-cash impairment provision is expected for NCS Australia due mainly to the higher cost of capital.
Arthur Pineda of Citi Research says now is the time to “buy” on the dip. Shares in
Singtel opened 3.3% lower on April 29 at $2.33. It has since climbed back about 2% to $2.39 on April 30. The research house has also increased its target price to $3 from $2.88 previously.
Pineda is of the view that the non-cash impairment noise should be overshadowed by better free cash flow (FCF) and yield prospects.
“We highlight this is a non-cash item and does not bear any relevance to its dividends which are paid out of recurring income, nor our sum-of-the-parts (SOTP) with Citi/street valuations likely well below Singtel’s carrying value on Optus to begin with,” says Pineda.
The move to announce impairments ahead of the release of its results in late May likely serves to remove distractions from any potential capital management activities, which Pineda believes can materialise owing to the availability of excess cash from prior asset sales.
In addition, the separate move to strike a network-sharing deal with TPG in Australia serves to create value by optimising capital expenditure and obtaining about A$0.9 billion in net cash inflows from TPG over 11 years.
Meanwhile, Maybank Securities also increased its target price to $3.10 from $3.05 previously, as analyst Hussaini Saifee sees this correction as a “buying opportunity”.
“Optus’ fundamentals have improved on the network pact while the impairment charges are non-cash in nature and thus unlikely to impact Singtel’s dividends,” explains Hussaini, who forecasts an FY2024 dividend of 11.85 cents, translating to a 5% dividend yield.
“More importantly, we forecast FY2024– FY2027 earnings CAGR at 16% and see the potential for dividend per share (DPS) to grow alongside earnings. Following the announcement, we raise our FY2025–FY2026 core earnings by 1%–2%,” says the analysts, also forecasting FY2024 earnings to come in at $123 million, incorporating the asset and goodwill impairment.
RHB Group Research has kept its $3.15 target price. The stock also remains to be its preferred sector pick.
The research team says: “We detected a more cautious tone from management following the revelation of sizeable non-cash impairments to be booked in 4QFY2024. Singtel will elaborate on its ‘refreshed’ enterprise strategy post FY2024 results. Its three-year
cost-out programme ($600 million) and focus on new growth engines should lift ROIC to the low teens by FY2026.”
UOB Kay Hian has reiterated its $2.99 target price, as analysts Chong Lee Len and Llelleythan Tan expect minimal near-term earnings impact for Singtel from its 11-year A$1.6 billion network sharing deal with TPG in Australia, receiving about A$900 million of incremental cashflows over 11 years.
As for the impairments, management noted that the group does not expect any further impairments and deems the current impairments sufficient. After the impairment, it was noted that there is still around $5.9 billion of goodwill left for Optus.
With these exceptional non-cash provisions, barring unforeseen circumstances, Singtel expects to report a net loss for 2HFY2024. Stripping this out, FY2024 underlying net profit is estimated at $2.2 billion. “The group remains on track to pay at the upper end of its dividend policy at between 70% and 90% of underlying net profit, unaffected by the non-cash impairments. Based on our estimates, we still expect an FY2024 dividend yield of 5.1%, implying a dividend payout ratio of around 90%,” say Chong and Tan.
HSBC Global Research analysts Piyush Choudhary and Rishabh Dhancholia have also maintained their target price of $2.90 as they see the deal between Optus and TPG Telecom as an “incrementally positive” one for the former. “[The deal] structurally improves competitiveness and free cash flow,” they write in their April 29 report, adding that Optus’ capex intensity is around 19% of its revenue in FY2024.
“If Optus lowers capex intensity by 1% of revenue (versus our forecasts), it increases Singtel’s fair value by 2.5% (almost 7 cents per share),” they note. The analysts have not made changes to their forecasts yet as the deal is subject to regulatory approval.
Overall, the sharing of spectrums is a net positive as it should improve network capacity and quality of service for the telco.
“More importantly, incremental cash flows over the next two to three years should help to accelerate 5G network rollout in regional Australia,” they add. In their view, the deal is a win-win for both Optus and TPG; it improves Optus’ ability to compete effectively and strengthens TPG’s capability to compete in regional Australia.
Like its peers, the HSBC analysts do not see any impact on Singtel’s dividends due to the non-cash nature of the impairment.
Looking ahead, Choudhary and Dhancholia see Singtel’s dividends and profits improving due to growth in its core business and profits from its regional associates.
“Singtel’s core business growth should be driven by cost optimisation, growth at NCS and data centres,” they write, pencilling a core ebit growth of 7.2% y-o-y in FY2024 and 7% y-o-y in FY2025.
“We expect regional associates’ profits to rise as average revenue per user (ARPU) is improving across markets. As such, we expect underlying net profit to expand. We forecast Singtel’s ordinary dividend to rise 21% y-o-y to 12 cents per share in FY2024 and expect a special dividend of 3.5 cents per share as the company has excess proceeds from capital recycling initiatives. Thus, we forecast total dividends to be 15.5 cents per share in FY2024 (+4% y-o-y),” they add. —