To The Moon

$SINGTEL(Z74.SI)$

RHB Group Research team has kept a “buy” rating on Singtel with a target price of $3.37, as the group is well on its path towards growth. RHB also notes that the stock is the best performing Asean-4 telco YTD with its latent value progressively realised from sharper execution.

To recap, Singtel on Mar 28, acquired ARQ for A$290 million ($295.4 million). This acquisition comes shortly after Singtel acquired Dialog for A$325 million and cloud consultancy Riley that specialises in Google cloud applications, as well as a majority investment in cloud transformation specialist Eighty20 Solutions. The group’s acquisition spree for these companies happened in a short span of 15 months.

According to NCS’ CEO Ng Kuo Pin, the ARQ acquisition is the final jigsaw piece in the group’s strategic plans in Australia to expand its footprint in the market and widen its enterprise offerings.

Following the acquisition, Singtel’s Australian enterprise business (under wholly-owned NCS) has seen its headcount treble to 1,900 with a presence across most states. Dialog Group – Australia’s largest privately-owned IT firm – is EBIT accretive from the outset and boasts a lucrative Tier-1 clientele base in the public sector, healthcare, transportation, financial services and technology segments, while ARQ Group has deepened its cloud and digital capabilities in Australia with a complete suite of digital enterprise offerings.

The RHB research team cites Gartner Research that has projected a market value of A$39 billion in 2022 (+6.1%) for IT services while IDC expects that digital services in the Asia-Pacific region will grow at a compound annual growth rate (CAGR) of 14.6% from 2020-2025, reaching US$171 billion in 2025.

“We see good revenue upside from scale benefits and cost synergies,” says the team. “This should allow Singtel to fortify its Australia enterprise business and capture stronger ICT growth opportunities in the Asia-Pacific region.”

To that end, the research team is not too worried about the group incurring debt from its investing spree, as it is upbeat on Singtel’s value unlocking and capital reallocation exercises. And it seems that investors are also positive on this, as the stock’s 14% price gain YTD implies Singtel’s overall transformation plan resonates well with investors. This includes certain unlocking of value of infrastructure assets and capital recycling efforts, such as the sale and lease back of Australian Tower Network and monetisation of 1.6% stake in Airtel Africa.

As much as Singtel’s enterprise segment is seeing growth, so is its consumer segment, thanks to the gradual resumption of travelling.

The team observes that group consumer mobile revenue posting stronger y-o-y growth in the March quarter (4QFY2022) from the recovery in roaming and prepaid revenues as border controls are relaxed. The reopening of the Singapore-Malaysia border effective Apr 1 should further bolster inbound/outbound roaming revenues given the huge number of daily commutes between both countries and the route making up a sizeable share to overall roaming revenue.

“We note that Singtel’s roaming revenue made up approximately 20% of mobile service revenue pre-pandemic but this has since slipped to mid-single digit levels due to travel restrictions and lockdowns over the past two years,” says the team.

On a whole, The team sees a strong turnaround for Singtel’s mobile business from the reopening of borders and further value unlocking from its capital recycling and portfolio optimisation programmes.