THE agreement between Singapore Telecommunications (Singtel) and Bharti Telecom (BTL) for the sale of 3.3 per cent of its direct stake in Bharti Airtel will benefit Singtel&rsquo s cash flow and leverage, according to Moody&rsquo s Investor&rsquo s Service. 

 

In an Aug 26 report, Moody&rsquo s said it believes that the sale will help Singtel to fund its growth with less reliance on external borrowing. 

 

The telecommunications group&rsquo s leverage is expected to remain at a multiple of 2.2 to 2.3 times, below Moody&rsquo s threshold of a 2.6 multiple for an A1 rating. 

 

While Moody&rsquo s research team acknowledges a possibility of special dividends being paid out from the sale proceeds, it notes that Singtel&rsquo s management has clarified that dividends will be funded from operational cash flows.

 

Highlighting that Singtel has guided for capital spending of S$2.6 billion for FY2022, the credit ratings agency said it expects Singtel&rsquo s expenditure to remain high over the next 1 to 2 years on the back of its current expansionary efforts for 5G. 

 

While BTL does not have a material amount of existing debt, in Moody&rsquo s opinion, the agency said it would consider consolidating the company&rsquo s debt on a pro-rata basis in Singtel&rsquo s leverage should the group be required to provide support to BTL. 

 

This is given BTL&rsquo s relative importance as the holding company for a 38.7 per cent stake in Bharti Airtel, noted the agency. 

 

Moody&rsquo s further notes that Singtel&rsquo s coverage ratio remains in excess of a 3 times multiple following the transaction, as it continues to hold significant high-value investments in its regional associates and other listed associates. 

 

The sale process will conclude on Nov 23, 2022 and will bring Singtel&rsquo s effective stake in Bharti Airtel to 29.7 per cent from 31.4 per cent currently. Moody&rsquo s sees limited stake dilution for Singtel at just 1.7 per cent, as the group continues to own 49.44 per cent of BTL after the transaction.

BILL Chang, Singtel : Z74 -0.75% group enterprise chief executive, readily acknowledges that the telco&rsquo s carriage business, which includes selling data and fixed voice services, has been under pressure.

 

&ldquo The carriage business has been one that is, generally in the market, seeing slow growth, and declining growth in some areas, because of (the availability) of bigger bandwidth and people are competing heavily on price,&rdquo he said.

 

For the 6 months to Mar 31, Singtel saw its group enterprise segment&rsquo s operating revenue decline 2.5 per cent to S$1.87 billion. In particular, data and internet revenue declined 2.6 per cent to S$705 million.

 

But the company isn&rsquo t intending to cede market share in favour of margins. Rather, Chang believes it is essential for the telco to maintain its market leadership &ndash not just in Singapore but in the Asia-Pacific region as well.

 

Singtel is hoping to migrate its clients to software-defined wide area networks (SD-WANs), which have emerged as the next evolution of corporate networking.

 

According to Chang, the introduction of SD-WANs has helped mitigate some of the revenue loss from competitive pricing pressure and lower volumes as businesses consolidate their networks.

 

The innovation of SD-WANs for enterprise customers can be likened to the consumer migration from SMS-based texts and GSM-based voice calls to WhatsApp texts and Skype calls. With SD-WANs, companies can build networks using commercially available Internet.

 

SD-WANs can benefit companies in a number of ways. First, companies adopting such networks could reduce their operating and capital expenses. In certain cases, on-site equipment is not necessary because the networks can be managed remotely via software.

 

Second, employees can have faster network access to the Internet from their work devices. SD-WANs can separately route internal traffic bound for a company&rsquo s servers back to its headquarters. Other Internet traffic, such as video conferencing or web apps like Google Drive, can be routed through the public Internet instead.

 

Third, SD-WANs can also improve network security when configured with newer firewalls that secure employees&rsquo connections to the internet, regardless of their internet set-ups. This could be especially important as more people work from home even after the pandemic has subsided.

 

Chang said more than 10 per cent of Singtel&rsquo s customer base has migrated to SD-WANs, with momentum building as more enterprises see the benefits of upgrading their networks.

 

Unlike the consumer migration to apps such as WhatsApp and Zoom, however, the migration of enterprise customers to SD-WANs can continue to benefit Singtel.

 

That&rsquo s because the company is still in a position to charge for its expertise in building and managing SD-WANs for enterprises in a secure way.

 

Chang said margins on managing SD-WANs will not be as high as those for older networks, however. &ldquo We have to ramp it up much harder and faster to really make up from a margin standpoint,&rdquo he said.

 

&ldquo The trend is the trend&hellip and we will have to double down, manage the cost as we deploy them and digitalise a lot so that we don&rsquo t have to carry a lot of costs.&rdquo

 

Diversifying into data centres

 

Singtel is also diversifying its capabilities in other growth areas. In June, Chang was appointed chief executive of Singtel&rsquo s data centre operations.

 

There has been a moratorium on new data centres in Singapore since 2019, but the Economic Development Board and Infocomm Media Development Authority had last month called for applications to build new data centres.

 

Chang sees the moratorium as a good pause for stakeholders to figure out how to build capacity more sustainably, and now expects demand for local data centres to be strong, even as other data centre operators have launched projects in Johor, Malaysia and Batam, Indonesia.

 

This is because companies will still need to keep sensitive user and business data locally if data sovereignty is a concern. Furthermore, companies seeking to leverage the lower network latencies afforded by 5G will need their data centres to be physically close.

 

Singtel has nevertheless hedged its bets, signing a joint development agreement with energy supplier Gulf Energy and its associate Advanced Info Service (AIS) to build and operate data centres in Thailand. It has also signed a memorandum of understanding with its Indonesian partner, Telkom, to build and acquire data centres in the region.

 

&ldquo Our goal is to be the leading player in South-east Asia, as the most green and sustainable data centre provider with the best internet connectivity offerings for enterprise connectivity,&rdquo he said, adding that the data centres will be carrier neutral and that bottlenecks will be reduced across Singtel&rsquo s data centres in the region.

 

Uphill task of convincing investors

 

Singtel&rsquo s shares have risen 13.7 per cent this year, to close at S$2.65 on Friday (Aug 26). They are, however, far from their peak of over S$4 in 2015.

 

This weakening of its share price is hardly surprising, given the steady decline in the company&rsquo s revenue and earnings over the past 5 years.

 

Singtel reported operating revenue of S$15.3 billion for FY2022 ended Mar 31 and underlying net profit of S$1.9 billion. In FY2018, operating revenue and underlying net profit were, respectively, S$17.3 billion and S$3.6 billion.

 

Its return on equity has slipped from 18.9 per cent to 7.3 per cent. And ordinary dividends per share have gone from S$0.175 to S$0.093.

 

For FY2022, Chang&rsquo s enterprise segment delivered the best performance among Singtel&rsquo s core operating segments. Operating revenue fell 1.1 per cent, which was better than the 5 per cent decline for the Australian consumer business and the 3.8 per cent decline for the Singapore consumer business.

 

Earnings before interest and taxes fell 1 per cent, versus a fall of 2.9 per cent for the Australian consumer segment and a 12.3 per cent decline for the Singapore consumer business.

 

With that, it may just fall to Chang to deliver the turnaround that Singtel&rsquo s shareholders are very much hoping for.

An analyst says GXS Bank stood out amongst fresh entrants.

GXS Bank prevailed amongst the winners of Singapore&rsquo s digital banking licences who rolled out their new digital bank in the middle of the year, analysis from Malaysian banking firm RHB, showed.

Of the four new entrants, GXS Bank, which is the joint venture between ride-hailing firm, Grab, and telecom firm, Singtel, &ldquo ticked most of the boxes for a successful digital bank,&rdquo said RHB.

&ldquo GXS Bank will require $1.5b in capitalisation over several years as service offerings increase,&rdquo read the report.

The analyst said Grab-Singtel venture&rsquo s main standout is their ecosystems, including Singtel&rsquo s widespread footfall and Grab&rsquo s strong e-commerce presence. 

Singtel is underappreciated

RHB also said it seems that Singtel' s entry into the digital banking space is not getting much interest from investors due to the perception that digital bank forays will post losses in their early operations. 

&ldquo Still, we believe, Singtel offers investors an alternative and attractive exposure to the digital banking space,&rdquo the analyst added.

Singtel&rsquo s financial services also entered in other markets aside from Singapore, such as their 16.3% stake in Bank Fama International from Indonesia&rsquo s Elang Mahkota Teknologi and its consortium with Grab acquired one of the  five digital bank licences that was granted by Bank Negara Malaysia.