Yahoo Finance Maybank remains upbeat on Singtel's prospects with NCS set to contribute to a bigger slice of the pie
Analyst Kelvin Tan sees NCS riding on a multi-year trend as digital transformation for enterprises is still in its early stages
Maybank Securities analyst Kelvin Tan is keeping “buy” on Singapore Telecommunications (Singtel) after the recent spate of acquisitions made by its wholly-owned subsidiary, NCS.
He has also kept his target price unchanged at $2.98.
On March 7, NCS acquired The Dialog Group, Australia’s largest privately-owned IT services company, for A$325 million ($325 million).
The acquisition was said to help NCS better support the Australian public sector and enterprise clients.
On March 28, NCS revealed that it had acquired digital services firm ARQ Group (ARQ) in Australia for A$290 million ($297 million).
According to NCS, the move will accelerate its growth in the digital sector in Australia.
“Integrating digital, cloud and platform services (NCS NEXT) with existing capabilities should support higher margins,” says Tan in his report dated April 7.
In addition, Tan sees NCS as riding on a multi-year trend, with countries in the Asia-Pacific (APAC) region only realising the need to digitalise recently.
He adds that the digital transformation for enterprises is still in its early stage.
According to the International Data Corporation (IDC), 28% of organisations in APAC are in the most progressive stages of digital transformation maturity, the analyst says.
“The three sectors that currently drive NCS’s business are: healthcare & transport; financial, industrial and commercials; and communications, media and technology. This has led to an unprecedented demand surge for digital and technology services, accelerated by Covid-19,” Tan writes.
“While projects can be deployed within three to five years, adapting to change can be slow, extending the runway,” he adds.
With NCS building new capabilities and expanding its business as a pan-Asian B2B digital service provider, Tan is expecting NCS’s EBITDA margin to widen on higher-margin cloud services.
“EBITDA has been on the rise and is currently at 10% of Singtel’s group EBITDA,” he notes. “This is a positive, but we see upside if NCS can demonstrate: comparable growth in bookings as peers; faster-than-expected revenue growth; and sustained margin expansion as NEXT’s services form a bigger proportion of NCS’ revenue.”
On Singtel’s EBITDA as a group, Tan is forecasting group EBITDA to register a 5.9% CAGR over the FY2021 to FY2023 due to the recovery in earnings following the Covid-19 pandemic.
“Pre-tax associate income could contribute to [Singtel's] bottom line by growing 27% over the same period, led by Bharti’s swing to net profit from net loss,” the analyst writes. “We expect net debt to EBITDA, including associate dividends, to remain healthy at 1.6x-2.2x in FY2021-FY2023; providing support to its fixed dividend per share (DPS) commitment.”
To this end, Tan says he continues to like Singtel’s ability to capitalise on regional leadership via exclusive tie-ups with private, public and associates’ businesses; drive new growth engines and unlock infrastructure asset value to drive growth.
Upside factors identified by the analyst include strong growth in enterprise and Digital Life to positive operating leverage; stronger–than-expected average revenue per user (ARPU) due to easing in price competition in countries it operates in; and faster-than-expected monetisation of 5G development.
Meanwhile, downside factors include the possibility of a failure to monetise the 5G development; a further wireless margin compression triggered by competition in Singapore and, or Australia; and worse-than-expected cannibalisation of wireless voice, SMS and roaming by data.
Shares in Singtel closed 1 cent lower or 0.38% down at $2.65 on April 8.
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