DBS upgrade today

Pleasant surprise from lower transformation costs

• 3Q23 net profit of S$37.3m (+37% y-o-y) 10% ahead of consensus due to lower-than-expected transformation and depreciation costs 
• &bull                       Our revised FY23F/24F earnings are 13%/6% ahead of consensus each we expect consensus to be raised soon
• &bull                       Upgrade to BUY with revised TP of S$1.25 based on over 6% yield and FY23-25F earnings CAGR of 8%

 

3Q23&rsquo s net profit of S$37.3m (-4.8% q-o-q, +37% y-o-y) was 10% higher than the consensus due to lower-than-expected transformation and depreciation costs.  STH recorded a Service EBITDA of S$106.4m (-2.5% q-o-q, +6.7% y-o-y) in 3Q23, which 2% higher than our expectations. Management indicated that transformation costs were lower than expected but did not indicate the magnitude of transformation cost for 3Q23 or FY23F.   More importantly, net profit rose much faster than service EBITDA due to a drop in depreciation and finance costs.  

Mobile revenue rose sequentially. Service revenue was S$526.0m (+10% q-o-q, +8.9% y-o-y) in 3Q23. Segment-wise, mobile revenue was S$153.3m (+1.8% q-o-q, +7.2% y-o-y) benefiting from higher roaming, VAS, and subscription revenue. Broadband service revenue was S$62.4m (-0.3% q-o-q, -1.9% y-o-y), based on intensifying market competition. Entertainment revenue came in at S$56.7m (-0.2% q-o-q, +2.3% y-o-y), as y-o-y growth was driven by higher subscription revenue, commercial TV, and ad revenue &ndash mostly from the Premier League. Enterprise business reported revenue of S$253.6m (+23% q-o-q, +15% y-o-y) lifted mainly by Cybersecurity services, which had a revenue of S$115.1m (+52% q-o-q, +45% y-o-y) due to higher project recognitions.  STH maintained its service revenue guidance of +3-+5% y-o-y growth for FY23F and service EBITDA margin of 22%.  Furthermore, CAPEX commitment guidance for FY23F was also maintained as 11-13% of total revenue.