• Still NEUTRAL; Top Pick: Singtel. Key highlights of 4Q23 reporting season: Further improvement in roaming traffic and cost restraint while competition stayed tight. Cost optimisation remains a key narrative, with industry consolidation not ruled out in the medium-to-longer term. We like Singtel for its improving ROIC, capital management prospects, and exposure to key markets undergoing price reparation. Management has refuted talks of an imminent sale of Optus, which could drive a 10-13% share price enhancement based on reported valuations.

• Mixed showing; dividends still decent. In the Dec 2023 reporting season, Singtel disappointed on FX weakness and lower associate contributions while StarHub trumped estimates on lower-than-expected depreciation. For Singtel, the 4% YoY slide in the AUD/SGD rate impacted revenue translation from Optus, while the steep depreciation of the Nigerian Naira (NRN) crimped associate contributions. StarHub dished out higher FY23 dividends (6.7 cents, DPR: 80%) as PATAMI recovered (+140% YoY) on early transformation synergies. Some key read-throughs for the quarter:
  
  i. Competition within mobile still keen with Simba Telecom on the offensive. While the price skirmish is largely focused at the lower end of the market and involves mobile virtual network operators, Singtel and StarHub have responded via tactical promotions. Stronger demand for SIM-only plans led to a longer device replacement cycle and softer re-contracting activities.
  
  ii. ARPUs bolstered by higher roaming traffic, 5G. Overall industry mobile ARPUs continue to tick up with the roaming traffic recovery, 5G uplift, and some seasonality, while prepaid ARPUs were stable. We gather that Singtel’s Singapore roaming revenues are at >90% of pre-pandemic levels from higher inbound travellers post reopening of China’s border. The reciprocal visa-free arrangement for China travellers (effective 9 Feb) should further catalyse roaming traffic going forward.
  
  iii. Enterprise segment marred by economic headwinds. Corporate ICT spending continued to be affected by economic headwinds and inflationary pressures. Structural demand for digital services, however, remained resilient – with stronger cloud and managed services revenues.
  
  iv. Cost-optimisation still a key narrative. Singtel is targeting SGD600m in indirect opex savings across its Singapore and Australian operations into FY26F, with benefits to accrue from FY25F. As part of its DARE+ programme, StarHub aims to achieve SGD280m in capex/opex savings into FY27F from the modernisation of its IT stack and cloud investments.
   
• Earnings moderated. Singtel’s FY24-26F core earnings were cut by 8-10% to factor in FX weakness and softer associate contributions. StarHub’s FY24-25 forecasts were lifted by 1-2% to account for the sale of D-Crypt, with FY26F numbers introduced. We believe Singtel is on track to meet the higher end of its 70-90% DPR (1HFY24: 77% DPR), supported by capital management activities and 1.5x net debt/EBITDA. Downside risks: Competition, weakerthan-expected earnings and FX rates. The opposite constitutes upside risks.

Source: RHB Securities Research - 14 Mar 2024