Excerpts from CGS International report

Singapore Telecommunications (SGX: Z74)

• Singtel 3QFY24 core net profit of S$559m a slight miss on weak associate profits. Singtel guided for FY24 dividend payout to be at the upper end of 70-90%.
• SG business should benefit from absence of Trustwave losses and NCS ramp-up, while cost synergies from restructuring should materialise in FY25F.
• Optus recorded margin expansion on concerted cost cuts. While there was some churn in 3Q, postpaid subs have since returned to growth in Feb 2024.

Reiterate Add with a lower TP of S$2.87 on lower associate profit estimates.

3QFY3/24: steady SG, weaker Optus and associates

Singtel 3QFY3/24 core net profit of S$559m (flat yoy) missed expectations as Bharti contribution was negatively impacted by FX losses for its African operations following devaluation of the Nigerian Naira.

9MFY24 core net profit formed 74%/72% of our/Bloomberg consensus FY24F. Optus revenue declined 5% yoy in 3Q while SG revenue held steady.

3Q group EBITDA rose to S$935m (+3% yoy) as the lower Optus contribution was offset by deconsolidation of Trustwave losses. 3Q share of associates’ pre-tax profits fell 13% yoy on lower contribution yoy from Bharti (-21%), Telkomsel (-15%), AIS (-5%).

SG cost synergies to show more meaningfully in FY25F

Singtel Singapore’s EBITDA margin saw some softness (-1.0% pt yoy) in 3QFY24, which we attribute to intense competition in the prepaid mobile space.

We believe margin uplift should be more apparent in FY25F as Singtel works to integrate its consolidated Consumer and Enterprise businesses and realise cost synergies.

Technology services subsidiary NCS saw 3QFY24 EBITDA margin up 3.2% pts yoy on concerted cost cuts, while bookings rose a strong 57% yoy; we expect NCS’s margin improvement to carry on into FY25F on

• Increased scale (driving stronger operating leverage), and
• Cost optimisation efforts.

Divestment of cybersecurity arm Trustwave would further support Singtel’s SG margin expansion in FY25-26F via removal of c.S$115m in Trustwave’s annual EBITDA losses.

Resilient Optus performance despite headwinds

Despite qoq churn in postpaid subs, Optus mobile service revenue still grew 3% yoy in 3Q on prepaid subs growth and stronger average revenue per user (ARPU).

3Q EBITDA margin beat our forecast at 25.8% (+0.9% pts yoy); we think this reflects some success in the group’s accelerated cost rationalisation.

While FX headwinds will likely stay in FY25F, we believe cost cuts and capex rationalisation should accord gradual EBIT margin expansion ahead.

Singtel booked a S$54m provision for the Optus network outage in Nov 23, which we think does not include any potential fines by the Australian government.

Valuation/Recommendation

Reiterate Add as we still see a healthy earnings trajectory ahead, with potential for asset monetisation in the coming quarters. We lower our FY24-26F core EPS by 2-8% as we lower our Bharti estimates further. Our SOP-based TP lowers to S$2.87 accordingly.

You can find the full report here and the company website here.