Singtel revenue could be hit by government contract repricing

A potential IPO of its subsidiary Amobee may offer some reprieve.

Embattled telco Singtel can expect further margin pressure as revenue from its managed services, which account for 37% of the group enterprise’s $3b revenue, is expected to compress due to re-pricing of large government contracts progressively from FY2019-2020, a report by UOB Kay Hian (UOBKH) revealed.

The pain will be drawn out for the telco as analysts expect managed service revenue to only stabilise by Q3 FY 2020 as Singapore prepares to roll out its 5G network, UOBKH analyst Chong Lee Len said. But although incumbent telcos like Singtel are well-placed to capture the 5G spectrum, leverage headroom will be limited at its current rating amidst an expected capex bump in FY 2020.

Singtel’s Q3 profits slid 14.2% YoY to $823m from $959m due to lower NBN migration and voice revenues, as well as margin erosion in its traditional carriage services as additional weights further dragged its earnings. In Singapore, operating conditions to be fiercely competitive with consumer revenue falling 5.7% YoY due to declines in equipment sales and voice revenues.

Also read: Singtel's profits crashed 43.5% to $3.10b in FY2019

The telco is said to be unlikely to post meaningful earnings growth over the next 12-18 months amidst heightened competition in its core markets of Australia and Singapore, according to an earlier report from Moody's Investors Service which expects the firm to explore alternative funding options like asset sales, listings and equity raising to strengthen its weakening capital structure

“Amidst lower voice usage and data competition in Singapore, Singtel aims to focus on good customer experience and superior content offerings. A lean cost structure via continuous digitisation (transforming with new operating model) effort is expected to yield stable earnings before interest, tax, depreciation and amortisation (EBITDA) margin for the traditional telco businesses,” Chong said, adding that the launch of GOMO – an all-digital, no-contract SIMonly product, will allow Singtel to capture the millennial segment.

“Anecdotal evidence suggests that cannibalisation on existing subscriber base is minimal. Threat of TPG appears muted at this stage,” he further said.

Also read: Singaporeans still prefer telco incumbents over disruptive upstarts: survey

Whilst HOOQ is expected to continue dragging Singtel’s earnings in FY 2020, Chong highlighted how the firm’s new businesses, Amobee and DataSpark, are EBITDA positive. Singtel is reportedly gearing up to grow Amobee by high single digits in terms of revenue and EBITDA and plans to monetise it in the next three years via an initial public offering (IPO) or private investors could be underway.

And amidst the heated debate on a possible Huawei ban, Singtel’s operating companies (opcos) appear ready to switch out in the event of escalating tensions between China and US given their multi-vendor strategy, Chong noted. “They should be able to renegotiate for better cost structure in the event of an outright Huawei ban.” 

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