Tuas Limited (TUA) Earnings Call Transcript & Summary

Good morning, all. I'm Richard Tan, CEO of SIMBA Telecom, the main operating vehicle of the Tuas Group. Also joining me on the call are Tuas' Executive Chairman, David Teoh; and SIMBA Telecom CFO, Harry Wong. It is my pleasure today to share with you the half year FY '23 results of Tuas Limited covering the period 1st August '22 to 31st January '23. Slide 2 lays out the agenda of our usual concise presentation, starting with Harry running through the financials. I will then cover the business updates and outlook. Last but not least, we'll reserve some time for Q&A. Do again note that the numbers reported are all in Singapore dollars. I will now hand you over to Harry.

Good morning, everyone. My name is Harry Wong, CFO of SIMBA Telecom Singapore. I will take us through the financials of the Tuas Group. On Slide 3, you can see that we achieved solid improvement in the financial results during the first half of FY '23 when compared to the first half of FY '22. Revenue this half increased to $39.6 million from $25.6 million in the prior corresponding period. EBITDA increased from $6.3 million to $14.3 million and net profit after tax of negative $7.5 million was a significant improvement on the corresponding period loss of $13.4 million. Next, we look at the key financial metrics on Slide 4. Revenue for the 6 months ending 31st January 2023 increased 55% over the same period last year. ARPU over the last 6 months averaged at $9.38 per month. You can see that as the business has grown, EBITDA as a percentage of revenue has increased with average EBITDA margin for this half of around 35%. As we have said in prior presentations, the key driver of this improvement is the operating leverage of bringing more subscribers onto our network. Slide 5 shows our continued subscriber growth quarter-over-quarter. The active services as of 31st January 2023 was around 691,000, an increase of 18% over the past 6 months. We proceed to the cash flow on Slide 6. Operating cash and term deposit balance was $49.6 million. Net cash from operating activities was $17.3 million. The main cash outflow comes from acquisition of plant and equipment and intangible assets of $23.1 million. This brings the end cash and term deposits to $43.3 million as of 31st January 2023. With this, I will let Richard proceed with the business updates.

Thank you, Harry. Slide 7 provides a short update on the 5G network upgrade. It is well on track, and we have been prioritizing the upgrade for base station sites, which have more connected subscribers. This is to deliver a bigger bang for the buck when we offer 5G services. There are no foreseeable hurdles to us achieving the 60% 5G outdoor coverage milestone by end December 2023. The new converged 4G, 5G network call is undergoing test as we speak, and we have also made our first voice over new radio test call. We are investing a significant amount of time and resources to validate our 5G network services with leading device vendors to deliver the best customer experience. Moving on to Slide 8. We have recently launched a new $20 plan, which is well received by customers. It clearly stands out with its generous roaming inclusions and features that give customers tremendous value when they travel. It is available across all channels, and our dealers are thrilled about it as well. Slide 9 covers an exciting development we have all been waiting for. SIMBA is pleased to announce our entry to the fiber broadband market in Singapore, and the banner shows our simple proposition, pay half the usual price and get double the speed. The register, your interest page, is now live, and we will be taking orders soon. We're leveraging Singapore's national broadband network and existing SIMBA infrastructure and the resulting incremental CapEx requirements are modest. The market size for consumer fiber broadband is around 1.5 million lines, and this undoubtedly represents a good opportunity for SIMBA. And finally, Slide 10, which covers the outlook for the business. SIMBA continues to grow its customer base month-on-month. As of this recent end February, we have more than 700,000 active services and the growth momentum continues. CapEx for FY '23, which includes 5G network upgrades, will be in the range of $45 million to $50 million as previously indicated. Last but not least, broadband is a new avenue of expansion, which positions us well for the coming years. That ends my presentation, and I will now hand it back to the moderator for the Q&A session.

[Operator Instructions] Your first question comes from Joseph Michael from Morgan Stanley.

Maybe if we could just start with broadband, please. Just keen to see how you're viewing the ramp-up phase for broadband. I'm just wondering, do you think it should be quicker than mobile now that you've got, I guess, some brand awareness and your competitors don't have a network advantage?

Well, we think that the opportunity, as indicated, it will be very good. Based on the responses that we have seen and the resulting expressions of interest that we have received, we think that the ramp-up should be good. And that's all I will be able to say at this point in time.

Okay. And do you think there's a cross-sell opportunity into your existing 700,000 mobile subscribers? Are they -- are you going after a similar customer? Or will it be different?

I think we are starting obviously from a very good position because we have 700,000 customers to reach out to. So without a doubt, we will see how we can leverage that so that they understand our offering better. But nevertheless, because from day 1, we'll be able to have full network coverage across the entire island. So everybody is obviously welcome to join on the bandwagon.

Okay. Great. And then just on the broadband unit economics, can you just confirm it's a flat fee of $13.80 per sub per month to the NBN? Is that -- can you confirm that comment?

Yes, that cost going to NBN per month is the number that you have indicated.

Okay. And then how should we think about the incremental OpEx? What's involved for a broadband customer in terms of call center staff, marketing? What's -- how should we think about the OpEx for each subscriber?

We have invested in the existing SIMBA infrastructure. And as mentioned in my presentation, we'll be leveraging off it. Any resulting incremental OpEx will be modest and building off what we have already built.

Okay. Great. And then I just had a question around the P&L. I guess one thing that's, I guess, difficult when you look at Tuas' P&L, the NPAT is not really reflective of the underlying performance of the business because the DNA is linked to historical CapEx. I'm just wondering if there's a way we can think of a cash NPAT number for this business. So I just wanted to check my logic here, like we've got a forecast of $34 million of EBITDA for FY '24. If you strip out, say, $10 million of sustaining CapEx, you get to sort of $24 million cash EBIT after tax, it's probably $20 million NPAT. I guess, I know you can't really comment on the numbers, but just wondering if you could comment on the mechanics or the way I've run through those calculations in getting a cash NPAT number. Is that kind of a fair way of thinking about the underlying performance for the business?

It's an interesting question. I think at this point in time, it is probably too early because we're still in the growth phase. And obviously, this is a target that we want to reach as soon as possible, NPAT positive. But based on the growth momentum, I would say that we have built the foundations to do so.

Okay. Great. I might just ask one more question, and then I'll go to the back of the queue. Just around CapEx. You've sort of indicated that you're on track for 60% 5G coverage by the end of this calendar year. Does that mean 60% of 5G CapEx will be deployed as well? Is that coverage a good proxy for the CapEx profile for 5G?

60% is by the end of this calendar year, but I think that you are well aware that the CapEx range that has been indicated of $45 million is for CapEx spend until July 2023. And anyway, a lot of the CapEx for 5G was front-end loaded as you are well aware, because there was also a need for us to deploy the 5G network call. Subsequent to that, any CapEx for 5G beyond FY '23, obviously, will be more for coverage expansion.

Okay. So if it's front loaded, then I guess, will you be above 60% of the CapEx deployed by the end of this calendar year. So I guess I'm just trying to understand, is FY '23 peak CapEx? And I know you haven't given FY '24 CapEx guidance, but just trying to understand directionally, will it be lower than FY '23 if it's a peak?

I think directionally, you would always -- it will always be clear that a lot of our CapEx will be allocated to 5G to grow our coverage for the following years because it is important that we deliver a good 5G experience.

Your next question comes from Darren Odell from Peloton Capital.

Just 2 questions from me. And just following on from what Joseph was saying before. With your cash balance and the cash that can be spun off in full year '24, is it quite likely that going into the next financial year that you would look to pay a dividend at some point?

I think you have seen the cash balance as of January 31 of this year, and we'll be managing off our cash balance as best as we can. We can't provide any further color other than that.

And just one other question, just in relation to the broadband market in size. From your 700,000 subscribers at the moment, backing out the migrant workers, do you have a number at hand that you -- the households that you can reach at the moment? And also within those households, how many of them have a mobile subscription with you?

Okay. It's an interesting question. As you know, we are leveraging Singapore's NBN network, which gives us a full 100% coverage from day 1. In fact, that NBN network probably reaches something like close to about 1.7 million, 1.8 million homes. So without a doubt, we have full coverage from day 1. And many of our subscribers are living in those homes as we speak. So I think Joseph did ask about the cross-sell opportunity. We will just ensure that they understand our proposition, and we will be keen to sign them up as quickly as possible.

[Operator Instructions] Your next question comes from Ian Martin from New Street Research.

Yes, I had a few questions around cash flow as well, which you've largely addressed. But if I could look at the EBITDA, $14 million and operating cash flow of $17 million, pretty close. You don't do any kind of device subsidy or device financing or anything of that nature, do you? So I just wonder, is there anything meaningful -- any meaningful difference between those 2 numbers? Or is it just timing?

This is all largely timing. And as you know, we don't do devices.

Yes. And so when you go to broadband, is there any prospect that you might be doing some financing of modems in the broadband offer?

So the good news is that the cost of electronics have indeed come down quite a bit, albeit the supply chain issues that we've all been hearing about. The cost of the modems are extremely modest. So we don't foresee that being much of an issue.

Okay. Just going to CapEx, which I know you've largely addressed, but I was interested as well in what happens once you get to that 60% 5G mark. Are there any further obligations for rollout beyond that? Or does that mean that you can pace your coverage depending on what your free cash flow is?

Based on our obligations, we have to reach 95% coverage within the first 5 years on the award of our 5G license. So that is the bookend that we have to target...

So 95% outdoor coverage...

Yes, outdoor coverage at the end of 5 years from the day the 5G license was awarded. Obviously, we would be focusing on delivering the biggest bang of the buck as I've indicated in our presentation and focusing on where 5G should be meaningfully deployed because there's no point rolling out 5G where there's unlikely to be demand, given that customers until this day do not seem to understand the difference between 4G and 5G.

Yes. So the best use of 5G, I mean the initial users are largely business users, aren't they. And I just wonder whether you've got what your plans and prospects are for addressing the business market, if you've given that -- does that feature in your planning at this point?

We will be addressing the entire market without a doubt because we will not leave any stone unturned. So every segment of the market is important to us.

All right. And any thought about private LTE markets? Do you do any private LTE investment for private networks, I mean?

We haven't done anything -- we have not done anything that touches on private enterprise market per se. But nevertheless, it is interesting, and we will look into it.

Your next question comes from Han Xu from Smallco.

I just had a couple of quick questions around the financials. Could you maybe give us some directional hint on where your gross margins could be heading given it's been improving sort of consecutively for a few years? And if you were to add another 700,000 subs to the network for cutting, what kind of incremental cost would you see? And where do you think the gross margin could land?

I think we have previously said that cost is -- as far as cost is concerned, 35% of the cost is fixed, 65% is variable. We'll let you do the math.

Okay. And just on the ARPU, I think a small uptick this half versus previous. Do you have any thoughts on the ARPU strategy and how you see the mix of different plans driving ARPU going forward?

I think with the launch of the new $20 plan, you can clearly see that it is obviously our intention to lift the ARPU. And with the reopening of travel globally, especially outbound from Singapore, we have seen an improved mix as far as our plans are concerned as well as increase in roaming revenue, so that contributed to the uptick in ARPU.

Should that continue into the second half? Or do you think that shift is pretty much reflected?

Well, we believe that with the new $20 plan and continued growth in roaming, there should be hopefully modest increases in ARPU, and that's what we are aiming for.

Your next question comes from Joseph Michael from Morgan Stanley.

I just had 2 follow-up questions. Perhaps for David, given you're in an unique position where you've got a deep history in understanding of the Australian telco market and now the Singapore market. I guess my question is, what are the key differences between the Australian and Singapore broadband markets? I'm just trying to understand if Singapore is more attractive or less attractive.

Joseph, I think you gave me a very hard answer to -- hard question to answer. I'm out of touch of the Australian market. I kind of in a retirement mode in Australia. So I can't answer you that. But definitely in Singapore, it's quite a competitive market. And -- but there are still a lot of opportunities. I think our fiber broadband is quite exciting. We're offering a very good product where no one has positioned 2.5 gigabit per second fiber broadband there, and also the price is very attractive. So I think it's a good opportunity for SIMBA Telecom to do well in Singapore in that respect, which I believe. So I can't really comment on the Australia side.

Okay. Great. And then just one follow-up question. I mean, your initial offering is at such a big discount to the competitors in Singapore broadband. Just trying to understand why can Tuas do that? Why can you offer a product so cheap? And I'm guessing the competitors just can't match it.

I think we're trying to keep it simple. We only have one product, one plant. It's very simple. It's plug and play. So we're trying to keep our cost low, very simple for customers to get the modem, plug it in, it works and very simple for our sales and marketing team to do the job. So we keep our overhead low and the cost low. So it's a good product, simple and easy. So it's an exciting product.

There are no further questions at this time. I'll now hand back to Mr. Tan for closing remarks.

Thank you all for your questions and valuable time. This ends our results briefing, and we wish you all a good day ahead. Thank you.