Singapore Telecommunications Limited (Z74) Earnings Call Transcript & Summary

Hello, everyone. This is Ivan from SGMoneyMatters, book author of Fire Your Retirement, 3 Simple Steps to Financial Independence and Retire Early. Many of you follow my blog. I have a Telegram channel to get the latest financial updates to invest wisely and retire with style. Today, we have a special guest with us. Over the past 3 years, Singtel has undergone a remarkable transformation, thanks to the strategy reset that has positioned the company as a key player in the digitalizing world. Their share price has surged over 20% this year alone, significantly outperforming the Straits Times Index. I'm honored to have with me today, Singtel's Managing Director, Group Finance, Siok Hoon. Today, we will discuss about Singtel's transformation and their forward-looking ST28 strategies.

Thank you, Ivan. It's great to be here today. I've been following our work at SGMoneyMatters, and I'm very excited to share with you Singtel's journey as well as our future plans with you and your audience. But before that, a short introduction about myself: My name is Siok Hoon, the Managing Director, Group Finance for Singtel. So my current role entails looking after the finance matters for Singtel Group. Now my past experiences have enabled me to look at things not just from a finance angle but also from a business angle, having been in various business roles, including sales and marketing within Singtel. My recent stint as the Deputy CFO of Optus, which is our Australian telco business, has also enabled me to have a deeper understanding of our overseas operations.

First of all, let us start with strategic rest, which transformed Singtel for the past 3 years. Can you share with us how does this reset change the company's operation and the day-to-day business?

Very good question. Now strategic reset was introduced during the COVID period amid accelerated digitalization. And what it has done is that it has fundamentally transformed our business. So we have simplified our operating structure, and let me summarize for you what we have done. Firstly, we have consolidated the consumer and business units in both Singapore and Australia in order to drive more synergies. And as a result of that, we have introduced a SGD 600 million cost-out program over the last 3 years, which spans our fiscal years 2024 to 2026. Secondly, we have introduced 2 growth engines, which we have carved out. One is our NCS, which is our IT services business; and secondly, is Nxera, which is our data center business. And the reason for carving them out is really to illuminate their value and enable them to scale more rapidly. Thirdly, we have exited from our loss-making digital investments in Amobee and Trustwave, which removed SGD 200 million in annual EBIT losses. So beyond all of these structural changes, we also introduced capital recycling program, which has raised $8 billion to date. And the capital recycling program is designed to optimize the use of our capital so that we can use it to fund our growth initiatives to pay down debt as well as to return to our shareholders.

How did Singtel achieved this?

Singtel has a very diverse portfolio of assets, which we have unlocked over the last 3 years. One of our first major divestment was actually the sale of our Optus tower assets for SGD 1.9 billion to AustralianSuper, which is one of the largest pension funds in Australia. We also established capital partnerships with investors like KKR who invested 20% into our data center business for SGD 1.1 billion. So what this has done is that it allow us to achieve record valuation on our data center business, which was previously trading at telco multiples. Now another example of a capital partnership is our partnership with Lendlease to redevelop Comcentre headquarters. This has helped to unlock the latent value of our property. So all of these initiatives have unlocked $8 billion to date, and we have used that capital to fund our growth initiatives, to pay down debt and also to return to our shareholders.

That's very impressive. It looks like ST28 is going to be something of blueprint of Singtel for the next few years. Am I right to say that?

Before we got to Singtel 28, we proactively engaged our investors to get feedback from them on what else we need to do. So the investor feedback was premised on 4 key themes. Firstly, they want us to continue to improve our core business performance. Secondly, they said they like our growth engines, but they would like to see it scale even faster. Thirdly, they want sustained dividend payouts. And last but not least, they want to be able to see how our capital recycling program actually links to our dividend. So Singtel 28 is meant to address all of these points. Singtel 28 actually has 2 prongs to this growth plan. Firstly, is to lift our business performance, both in terms of our core business as well as our growth engines. And secondly, it's smart capital management so that we can reward our shareholders better. So we believe that by delivering this, we'll be able to achieve sustained value realization for all our shareholders through higher growth and higher dividends. When we say lift business performance, we mean that we will grow both our core business as well as our growth engines. And how do we plan to do that? So in lifting our core business, what we plan to do is really to reap the benefits from the consolidation of our consumer and enterprise units, I mentioned to you earlier, as well as simplifying our product offerings and remove complexities for customers. And also through the SGD 600 million cost-out program, we will get to a leaner cost structure that will enable us to compete more effectively and strengthen our market positions in both Singapore as well as Australia. Now for our growth engines, what we are doing is really to ride on the wave of AI and digitalization. So NCS, our IT services arm, is repositioning itself as a leader in AI and digital resilience and is investing to build capabilities on this front. For Nxera, which is our data center business, it is going to grow its capacity from the current 62 megawatts in Singapore to more than 200 megawatts in the region over the next 3 years. And this will be funded by the $1.1 billion capital from KKR. Now for our regional associates, which are in the emerging markets, the next phase of growth is going to come beyond mobile. It will be in the area of fixed broadband, in enterprise because these are still underpenetrated in the emerging markets. So it's important that we lift business performance across the Singtel Group because that our core dividend, which is pegged to 70% to 90% of our underlying net profit, will also grow in tandem.

Can you elaborate more about how Singtel do the capital allocations?

Smart capital management is not just about paying higher dividends. We work with capital partners like KKR so that we can fund some of the capital-intensive growth engines that we have, for example, our data center business. So we balance that with ensuring that we have sufficient returns for our shareholders. And in line with Singtel 28, I'm pleased to share that we have revised our dividend policy so that there are 2 parts that will reward our shareholders better. The first part is what we call the core dividend that is still pegged to 70% to 90% of our underlying net profit, and this will grow in tandem with our business. The second part, which we have introduced, is a value realization dividend or VRD for short. And that is to share the rewards of our capital recycling with our shareholders. So this is expected to add another SGD 0.03 to SGD 0.06 per share annually to our core dividend, thereby making the total ordinary dividend much better. In FY '24, you will see that we have increased our total ordinary dividend by 52% to SGD 0.15 per share.

Is that also part of the reason that the share price has come up quite a lot this year?

We are very happy that we have received very positive response from our shareholders since we announced Singtel 28. As I mentioned, through the VRD, we are able to add another SGD 0.03 to SGD 0.06 per share annually to our ordinary dividend. And this is actually supported by a robust capital recycling pipeline of a further $6 billion that we have identified, which will fund both growth as well as the VRD. Since the announcement of Singtel 28, our share price has risen by about 20%, outpacing the STI and MSCI. And we believe that we are on the right track. So continuing to execute to Singtel 28 we believe will help us to close the valuation gap and align our market value more closely to the analysts' consensus target price, which is actually SGD 3.44.

Do you see that the current price does not reflect the intrinsic value of Singtel?

The analysts are saying is the target price is SGD 3.44. There's still a gap, right, between what we are trading at versus analysts consensus target price. So we believe that executing well to Singtel 28 will help us to close that valuation gap.

As we hope -- we are hoping that day, it will come soon.

Yes.

So ST28 is a very big plan and they will be across multi-years. Going forward, from a forward-looking perspective, what are the risks and the challenges you foresee when executing ST28?

Any business will always come with risks and challenges. It's really about how we navigate through this. So if I were to look ahead, first and foremost, is really about the geopolitical risk is on the rise, and it does present some uncertainties to us because we operate in different markets, right? And for us, the key is about leveraging on our strategic partnerships. So we have very strong local partners in each of the markets that we operate in, which help us to navigate the complexities of the individual markets. And for our regional associates, our long-term partners have served us very well, and we intend to replicate this formula for our growth engines like the data center business. So for example, in the data center space, where we are building out in the region, we are also partnering with the same partners as our regional associates in Indonesia and in Thailand. The second key risk or opportunity is really about technology, right? We all know the technology is evolving as we speak. And the key is really for us to keep pace with the technology changes. So we are very focused on innovation, look at network slicing, which is something that we are the first to lead in. And also, we intend to ride on some of the macro trends out there such as AI and digitalization, which is why we are investing in growth engines like NCS and Nxera to capitalize on this trend. The third risk I see is really about the allocation of capital, right? When we look at some of the capital-intensive projects, how do we allocate capital so that we can balance growth as well as returns to our shareholders. So the way we do it is really through capital partnerships. Capital partners, they provide patient capital for the longer dated capital-intensive projects like data centers. So they are able to come in, help to -- with the funding as well as provide the strategic expertise and illuminate the value, right? So while we do this, then we ensure that our other operating business generates enough cash flow to return as dividends to our shareholders. So this is really a balance that we continuously manage on a day-to-day basis.

Before we wrap up today's session, which is very insightful and I'm very glad to have this first-hand information from you, could you give us just 1 key message to all the investors and the shareholders like us?

Let me wrap up by summarizing what Singtel 28 is all about. Singtel 28 is really premised on lifting our business performance and smart capital management so that we can deliver sustained value realization for all our shareholders through higher growth and higher dividends. And if I were to summarize what Singtel's investment proposition is, it is really about delivering meaningful earnings growth that is backed by improving our core business performance as well as increasing the performance and contributions from our growth engines. And as we grow the business, our new dividend policy is designed to reward our shareholders with higher dividends. So in short, investing in Singtel means that you are getting a blend of growth and yield, which to me is the best of both worlds.

Exactly. That's very exciting. That means Singtel has moved from a transformation stage to growth stage. That means we can see both the capital appreciation and also the dividend growth in the future. Thank you for your time today.

Thank you.

And thank you for staying with us. Do follow Singtel for more upcoming exciting news and stay tuned with SGMoneyMatters. See you next time.