“It is like you buy a house and the house comes with a huge diamond that isn’t valued,” says Singtel CFO Arthur Lang.
Singapore Telecommunications (Singtel) is the “fairest of them all”, says Maybank Securities Research analyst Kelvin Tan, boasting the highest environmental, social and corporate governance (ESG) rating among telcos here.
Aside from its “leading ESG traits”, Singtel shareholders can also look forward to higher return on invested capital (ROIC) and “sustainable” dividend yield, adds Tan.
In a Sept 29 note, Tan maintains his “buy” call on Singtel with an unchanged target price of $3.15, which represents a 20% upside. This is above Singtel’s 52-week high of $2.83 per share, with a 52-week low of $2.32 per share.
“We have introduced an enhanced ESG tear sheet for Singtel and assigned it an above-average overall score of 85. This is the highest ESG rating within the Singapore telco sector, based on the group’s aggregated quantitative, qualitative and target-based metrics,” writes Tan.
Among its ESG goals, Singtel targets a 25% reduction in Scope 1 and 2 greenhouse gas (GHG) emissions by 2025 from its 2015 baseline. Against this target, the telco has thus far achieved a 3.3% reduction.
In FY2022, Singtel identified 15 categories of indirect GHG (Scope 3) emissions from its value chain. There is, however, no mention of its progress on a sustainable financing target, notes Tan, which it should be looking to establish a baseline soon.
Sustainable dividend yield
Singtel expects to improve its ROIC to a high single digit in the next two to three years, up from 5% in FY2022. Proceeds from asset recycling — $5 billion earmarked from partial stake sale of Bharti, Optus tower and monetisation of Singtel HQ — would be used to cover incremental 5G capex in Australia and current growth engines, notes Tan.
On Aug 25, Singtel announced that it will dispose of 3.3% stake in Airtel to Bharti Telecom for $2.25 billion. The divestment was completed on Sept 27 for a consideration of $2.54 billion.
Following the completion of the divestment, Singtel's effective stake in Bharti Airtel now stands at 29.7% from 31.4% previously. The remaining stake of 29.7% is estimated to be worth $22 billion. It comprises a 19.2% indirect stake through Bharti Telecom and a direct stake of 10.5%.
“We like Singtel’s ability to pay sustainable dividends. With stronger core operating cashflows and an expected earnings recovery, we expect future dividends to grow in line with earnings, at 70%-75% payout ratio as compared to its dividend policy of 60%-80% of underlying net profit,” says Tan.
Singtel is most exposed to cybersecurity and personal data leakage risks given its nature of business, says Tan. “There have been minor lapses due to IT, process and human errors over the years, and Singtel was penalised for an immaterial sum.”
Optus, SingTel’s Australian mobile phone business, revealed in September that hackers accessed the personal information of as many as 9.8 million customers — over one-third of the population. Some 2.8 million of them lost details of passports, drivers licences or government-issued medical identity cards, triggering concerns about large-scale identity fraud.
Tan adds: “Going forward, Singtel will continue to educate its staff and improve practices and processes to minimise data breaches.”
Tan forecasts 5.9% ebitda compound annual growth rate (CAGR) over FY2023-2025 due to recovery following Covid-19.
Pre-tax associate income could contribute to Singtel’s bottomline by growing 27% in the same period, led by Bharti’s swing to net profit from net loss.
We expect net debt to ebitda, including associate dividends, to remain healthy at 1.6x to 2.2x in FY2023-2025. providing support to its fixed dividend per share (DPS) commitment.
Singtel’s CFO Arthur Lang thinks the company is undervalued. In an interview with The Edge Singapore, Lang says the total value of Singtel’s various associates comes up to around $50 billion. Yet, Singtel’s market cap is hovering at around $43 billion.
This means Singtel’s core Singapore operations and its sprawling Optus business in Australia, which generated ebit of some $249 million in the most recent FY2022 ended March, have been disregarded by the market. “It is like you buy a house and the house comes with a huge diamond that isn’t valued,” says Lang.
As at 9.38am, shares in Singtel are trading 2 cents lower, or 0.75% down, at $2.64.