Singapore Telecommunications – Yield and growth

Excerpts from CGS International report

Singapore Telecommunications (SGX: Z74)

• Singapore Telecommunications (Singtel) 2HFY3/24 core net profit of S$1.1bn met our forecast. FY24 core net profit of S$2.26bn formed 101.6% of our full-year estimate.
• Singtel said in FY24 briefing that core dividend payout of low-80% is sustainable and VRD of S$0.03-S$0.06/share is over a 5-year horizon.
• DPS could range S$0.15-0.18 in FY25F, yielding 6.3%- 7.6%, higher than 4.7% for MSCI Singapore.
• Cost optimisation, revenue growth and absence of Trustwave losses likely to result in Singtel hitting double-digit EBIT growth in FY25F, in our view

Maintain Add and SOP-based TP of S$2.84.

Capital management is key highlight

Key highlight from Singapore Telecommunication's 2H24 results was its commitment to increase total ordinary dividends with the introduction of Variable Realisation Dividend (VRD) of S$0.03-S$0.06/share p.a. over the next 5 years from excess capital from asset recycling. Management emphasised that VRD is not ‘one-off’ but programmatic. Singtel also targets FY25F dividends from regional associates of S$1.1bn (FY24: S$1.3bn which included Telkomsel’s special dividend of S$0.2bn). In FY24, it declared a final DPS of S$0.06 and VRD of S$0.038, bringing total DPS to S$0.15. Management also said that core dividend payout of low-80% ahead (FY24: 82%) is likely to be sustainable based on underlying business performance. Based on our forecasts, total DPS could range S$0.15-0.18 in FY25F, yielding 6.3%- 7.6%, vs. 4.7% for MSCI Singapore stocks under our coverage.

Comfortable EBIT guidance

FY24 EBIT came in at S$1.1bn (+3.7% yoy) and management is targeting high-single digit to low-double digit EBIT growth in FY25F, driven by revenue improvements and cost savings of S$0.2bn in Singapore and Australia. The absence of Trustwave losses (FY24 EBIT loss: S$56m) also contributed to growth.

Decline in core capex for Optus; growth capex funded

Management expects total capex to grow to S$2.8bn in FY25F (FY24: S$2.1bn) with declines in core (Singapore and Optus) business capex. Notably, capex/turnover ratio  for Optus will decline to mid-teens in FY25F, from the current 20%. The capex for Optus includes partial payments for the A$1.5bn 900MHz spectrum. Singtel’s S$1bn growth capex guidance is mainly for its regional data centre platform, as well as seeding pilot GPUaaS (GPU-as-a-Service) business. Management noted that c.S$700m of the growth capex is funded by KKR and a major customer.

Valuation/Recommendation

Reiterate Add and SOP-based TP of S$2.84. We like Singtel’s relatively attractive dividend yield and healthy earnings growth, backed by concerted cost cuts and associates’ profit recovery. Re-rating catalysts include material asset monetisation and meaningful margin improvement from cost optimisation. Downside risks include prolonged mobile pricing pressure and forex headwinds from a strong Singapore dollar.

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