Excerpts from UOBKayHian report
Singapore Telecommunications (SGX: Z74)
- In line with Singapore Telecommunications ST28 growth plan, its value-unlocking initiatives remain on track which we reckon would come from paring down stakes in its regional associates and non-core fixed assets, likely leading to higher VRDs in the next 3-5 years.
- The group continues to improve its ROIC through better core operational performance while also doubling down on its future growth drivers, NCS and Nxera.
In view of a decent dividend yield of 5.2%, we maintain BUY with the same target price of S$3.58.
Improved ROIC to low double digits in the near term
Singapore Telecommunications (Singtel) has improved its ROIC from 8.3% in FY24 to around 9% currently, higher than its WACC of around 7%.
Management expects ROIC to continue its upward momentum towards its medium-term goal of low double-digit percentage in three years’ time, largely driven by improved profitability from its core businesses, its ongoing cost-out programme and better contributions from its regional associates.
Potential S$10b value unlocking exercise
Singapore Telecommunications value-unlocking initiatives remain on track. As a recap, management previously noted that the group identified about S$6b of capital recycling in the medium term which we reckoned would likely come from paring down its stakes in its regional associates and non-core fixed assets.
Specifically, we expect Singtel to pare down its 29.44% total effective stake in its regional associate, Bharti Airtel (Bharti), equalising its total stake with the founding Mittal family (23.7% total effective stake) over the next two-three years.
Given that Bharti’s share price has risen to all-time highs, we estimate that Singtel could gain S$8b-9b in cash by selling a 5.74% stake. Also, Singtel has identified about S$1b in non-core fixed assets and S$3b in assets from Thailand to monetise, which we reckon comes from paring down its stake in NewCo.
Furthermore, the group would gain roughly S$1b in cash in FY26 from the redevelopment of the Singtel Comcentre. Therefore, we estimate that the group now has S$12b-13b in monetisable assets that could be returned to shareholders.
Higher value-realisation dividends
In line with Singtel’s ST28 strategy, we now expect the group to pay higher value-realisation dividends (VRD) towards the tail end of its 3-6 S cents/share guidance. Based on our estimates, every S$1b in cash would lead to a 5- 6 S cents/share of VRD, around additional 1.9% dividend yield.
Backed by improving business fundamentals and a cash war chest of S$12b-13b within the next 2-3 years, we opine that the group could likely pay 6 S cents/share or even surpass its guidance sustainably for the next three-five years.
For FY25, we now expect a total dividend (including VRD) of 16.5 S cents/share, implying a dividend yield of around 5.2%.
Potential spin-offs
While we do not rule out a listing of Optus in the near term, management believes that the group will want to focus on operational performance and driving ARPUs higher amid an ongoing market repair.
Separately, Singtel’s growth engine ie NCS and Nxera will continue to focus on driving earnings given ample growth opportunities in the near term. As such, we do not expect any near-term spin offs.
Nxera will likely embark on capital raising exercises to expand its regional data centres through strategic partnerships, similar to the recent deal with Kohlberg Kravis Roberts & Co. (KKR).
To recap, Singapore Telecommunications reached a definitive agreement with KKR, for a 20% stake sale in the groups regional data centre business, committing up to S$1.1b over three years.
Valuation/Recommendation
Maintain BUY with the same DCF-based target price of S$3.58, (discount rate: 7%, growth rate: 2.5%). In our view, Singtel remains an attractive play against elevated market volatility, underpinned by improving business fundamentals and a decent FY25 5.2% dividend yield.
Key re-rating catalysts include: a) successful monetisation of 5G, b) monetisation of data centres and/or NCS, and c) market repair in Singapore.
You can find the full report here and the company website here.
