Singtel surges after report on Optus sale. Is there more upside?

What happened?

Singtel appears to be back on investors’ radar screen once again, especially for those looking for Singapore blue chip stocks paying out consistent dividends.

Earlier, we shared that Singtel has raised its interim dividends with an improvement in underlying profitability. 

Its share price recently bounced after an article from the Australian Financial Review (AFR) mentioned that Singtel was in “advanced discussions” to sell Optus, its Australian subsidiary.

This caused Singtel’s share price to increase from S$2.39 on 12 March to close at S$2.53 as of 21 March. 

According to the article, Singtel is looking to sell Optus to private equity giant Brookfield for A$16 billion.

Optus was owned by Singtel since 2001 and was acquired back then for around S$11 billion.

Investors may be curious as to whether this transaction will go through and whether this may also allow Singtel to transform its business. 

Let us dive deeper to find out. 

What you need to know about Singtel’s plans for Optus and its strategic reset

#1 – No impending deal to sell Optus at said sum

Singtel has released a statement refuting the AFR article.

In it, the telco said that “there is no impending deal to offload Optus for the said sum”, and Optus remains an integral and strategic part of the Singtel group.

Singtel’s focus for Optus is to improve its network resiliency and search for a new CEO.

The telco, however, did not deny that it was exploring options to optimise the value of its portfolio of assets and businesses to increase shareholder value.

#2 – Optus delivers a mixed financial performance

Optus did not perform well when it released its financial statements and update for the half year ended 30 September 2023 (1H FY2024).

Although operating revenue inched up by 1.4% year on year to A$4 billion, operating profit fell by almost 14% year on year to A$141 million.

The Australian telco’s mobile business saw growth but this was offset by weakness in its Enterprise fixed business.

Its mobile business did well with greater customer acquisitions and higher postpaid average revenue per user (ARPU).

Optus’s total mobile customer base grew by 167,000.

However, operating expenses increased by 3.4% year on year, driven by higher cost of goods sold and content costs along with increased energy costs because of inflation.

#3 – A string of unfortunate events

Optus was plagued by a 16-hour outage that occurred last November and affected around 10 million customers.

Singtel has announced that a routine software upgrade on one of its routers could be the cause of the widespread outage.

The group will continue to investigate the root cause and make announcements where appropriate.

Optus’s outage led to the resignation of CEO Kelly Bayer Rosmarin with a ministerial investigation in the works as the downtime prevented even emergency calls from being connected.

A year before this incident, Optus suffered a massive data breach that saw personal information stolen from its customers.

In its latest business update in February 2024, Singtel shared that Optus’ momentum has recovered in the past few months, and it has seen an improvement in brand perception as well as a stabilisation in customer churn. 

#4 – Singtel’s strategic reset

Singtel provided an update on its strategic reset during its most recent Investor Day 2023.

Singtel’s growth engines are firing on several fronts. In particular, NCS (Singtel’s business-to-business segment) and its regional data centre portfolio are seeing increased demand for digitalisation services with the adoption of artificial intelligence (AI).

The group is building up its regional data centre platform in Singapore, Thailand, and Indonesia to increase its capacity from 60 MW to 155 MW by 2026.

It will also explore opportunities in both Malaysia and China.

Over at the Grab/Singtel GXS Bank, digital offerings have gone live in Singapore since August 2022 with two main products – a savings account and a loan product, being offered.

GXS targeted to launch in Indonesia and Malaysia by the end of last year and aims to achieve EBITDA (earnings before interest, taxes, depreciation and amortisation) breakeven by fiscal 2026.

On capital recycling, Singtel intends to develop a pipeline of assets to explore monetisation opportunities.

For both fiscal 2022 and 2023, around S$5 billion of assets were recycled.

In the mid-term, Singtel expects to recycle a total of S$6 billion. 

About S$2 billion has already been raised from the sale of Comcentre and a 20% stake in the group’s regional data centre (RDC) business to KKR. 

Another S$4 billion of assets will be unlocked and the proceeds from the capital recycling diverted to investments in 5G, NCS, and RDC.

Singtel’s return on invested capital (ROIC) for fiscal 2023 stood at 8%.

The target is for the telco to achieve a low double-digit ROIC by fiscal 2026.

#5 – Singtel has been raising its dividends

In line with its strategic transformation, Singtel has also seen its dividends rise.

The slide above shows the telco’s core dividend payouts over the past five fiscal years (note: Singtel’s fiscal year end is on 31 March).

Since it announced its strategic reset in the middle of fiscal 2022, the dividend per share has risen from S$0.075 in fiscal 2021 to S$0.149 in fiscal 2023.

Investors should note for fiscal 2023 that S$0.05 comprised a special dividend paid from the proceeds from capital recycling.

Even if this amount was excluded, Singtel’s core dividend of S$0.099 would still be a slight increase from fiscal 2022’s S$0.093.

For the first half of fiscal 2024 (1H FY2024), Singtel’s interim dividend saw a 13% year-on-year increase to S$0.052.

Should this momentum continue, the telco could pay out a higher annual dividend for fiscal 2024 compared with the prior fiscal year.

Find out how much dividends you would have received as a shareholder of Singtel in the past 12 months with the calculator below.  

What would Beansprout do?

Singtel has denied that it intends to dispose of its stake in Optus for the said sum. 

The telco is, however, soldiering on with its strategic reset that includes investments in growth engines and active capital recycling.

The blue-chip group could identify other assets to divest in the future. 

Singtel currently offers a dividend yield of 4.2%, and these initiatives may enable group to raise its dividends further in the coming years. 

With the initial signs of Singtel's strategic reset appearing encouraging, we will be looking out for more signs that Singtel is able to unlock value for its shareholders. 

In the meantime, also do keep a lookout for these 3 Singapore stocks that may turnaround in 2024.

Related links:

• Singtel dividend history and upcoming dividends

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