Singtel falls 2.5% after announcing S$3.1 billion impairment hit

SHARES of Singtel fell 2.5 per cent or S$0.06 to close at S$2.35 on Monday (Apr 29) after the telco announced that it expects to recognise around S$3.1 billion in exceptional non-cash impairment provisions for the second half ended Mar 31.

The group said this will result in a net loss for the second half of 2024 and lower net profit for the full-year period.

However, it does not expect the provisions to affect its dividend payment and underlying net profit for the full-year period, which remains on track. 

The counter fell as much as 3.3 per cent to S$2.33 in intraday trading. It was the second most traded stock by volume on the Singapore bourse on Monday, with 95.6 million shares changing hands.

An ‘unexpected’ development

The recognition of impairment provisions comes as Optus, its wholly owned Australian subsidiary, expects to record A$540 million (S$481.6 million) in non-cash impairment provisions on its enterprise fixed assets.

The group foresees recording S$2 billion in non-cash impairment provisions on the goodwill of Optus, partly offset by a recently inked multi-operator core network (MOCN) agreement with TPG Telecom.

DBS analyst Sachin Mittal said the timing of the news was unexpected, coming right after Australian media reported a potential deal to sell a 20 per cent stake in Optus to Canadian private equity firm Brookfield had fallen through.

Furthermore, he noted that Optus’ consumer business has seen some recovery, although this may not have been enough to overcome the expected slowdown in its enterprise business.

Still, he said the news should not fundamentally change the market’s valuation of Optus.

While the revised enterprise value of Optus would stand at about A$13 billion, he noted that the market values Optus at about A$7 billion to A$10 billion. Therefore, he does not think that the news will affect his target price for Singtel.

“If one has to take a positive view, one can think that the revised value of Optus is still higher than market so if this recovery has long legs… then actually Optus’ value could rise,” Mittal said.

However, UOB Kay Hian analyst Llelleythan Tan said the impairment does not bode well for the performance of Optus in Australia as it battles other headwinds, such as a competitive mobile virtual network operator market as well as a string of incidents that battered consumer confidence.

Optus suffered a large network outage in November 2023 that affected 10 million customers across its mobile, broadband and landline services.

In September 2022, about 1.2 million customers were affected by a cybersecurity breach that compromised their data, with 100,000 current and former customers joining in a class-action lawsuit against the company in April last year.

Tan noted that the company may be seeing a cyclical downturn in its enterprise business, although this will likely remain a fast-growing segment of the industry.

He added that investors should continue to monitor the company’s average revenue per user over the next few quarters to see how it performs sequentially.

As for the network deal, both analysts said it is positive for Optus as it allows the company to roll out its 5G network at a lower cost.

Mittal said: “Without this deal, either they could lag in 5G (coverage) or… they have more free cash flow drain.

“Now, they can have a competitive 5G network without having to invest significantly.”

Dividend payments unaffected

Singtel said that barring unforeseen circumstances, it is on track to pay at the upper end of its dividend policy for the financial year ended Mar 31. The group’s dividend policy is to pay ordinary dividends at between 70 and 90 per cent of its underlying net profit.

The exceptional provisions will not impact dividend payment, Singtel added.

During its review of its investments, Singtel found that the recovery value of Optus group was below its carrying value as at end-March due to factors such as weaker prospects in the enterprise market, increased cost of capital and the softer macroeconomic outlook in Australia.

It also expects to record a non-cash impairment provision for goodwill of S$340 million for its Asia-Pacific cybersecurity business due to general business weakness amid lower corporate spending.

Some S$280 million in non-cash impairment provision for NCS Australia is also projected, mainly due to higher cost of capital.

The group said the figures are subject to finalisation as statutory audits are ongoing. Singtel’s audited financial statements for the financial year ended Mar 31 will be released on May 23.

Optus-TPG network-sharing deal

Separately, Singtel announced that Optus inked a network-sharing agreement with TPG Telecom. Both parties will create a regional MOCN, where they will share spectrum in regional Australia.

Optus expects to receive A$1.6 billion in total service fees over the 11-year initial term of the agreement, with some A$900 million in incremental cash flows. The agreement, which is non-exclusive, provides TPG an option for a further five-year extension.

Optus will allow TPG to tap its regional radio access network, allowing TPG to access 2,444 Optus mobile network sites in regional Australia. This will increase TPG’s current national 4G coverage from around 400,000 square km to around 1,000,000 square km and 98.4 per cent of the population.

Meanwhile, Optus will license some of TPG’s spectrum for use in the MOCN, which will boost its capacity, speed and service quality in regional Australia.

“The agreement will reduce combined 5G network rollout costs in regional Australia, which will enable the rollout of 5G infrastructure to be completed two years earlier than previously planned,” said Optus interim chief executive Michael Venter.

TPG chief Inaki Berroeta said sharing regional network assets will also bring coverage benefits to customers at a significantly lower cost versus duplicating infrastructure.

“In a country as large as Australia, this is the sustainable approach we need to maximise established infrastructure, and expand the reach of telecommunications services, competition and choice for consumers,” he added.

Optus and TPG plan to operate their own core networks to maintain independent control of security and resiliency. They will continue operating their own 4G and 5G radio access networks in metropolitan areas.

The MOCN agreement is subject to regulatory approvals. Both parties expect the network to be available to their customers in early 2025.