Time to Buy Singtel Stock After Net Profit Climbs 24%?

Singtel stock earnings

Tim Phillips

February 17, 2022

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For most Singapore-based investors, when we think of dividend stocks we generally rub our hands at the prospects of the regular tax-free income streams.

While banks and real estate investment trusts (REITs) have been the usual suspects for dividend investors, telecommunications companies also used to be investor favourites for dividends.

That’s because telcos tend to pay regular dividends based on subscription fees that are stable. However, of late, that’s not been the case – particularly for leading local telco Singapore Telecommunications Limited (SGX: Z74).

Also known as “Singtel”, I’ve written previously about why the company isn’t the ideal dividend stock to buy given the other options we have in Singapore.

However, in its third-quarter fiscal year (FY) 2022 earnings (for the three months ending 31 December 2021), the company saw some encouraging numbers.

So, is it time for dividend investors to buy Singtel stock after its latest earnings?

Profit increases by nearly a quarter

If we look at the bottom line of Singtel’s latest earnings, the immediate numbers look great. For the latest quarter, the telco posted a 23.8% year-on-year rise in net profit to S$734 million.

However, that came with a caveat – it was mainly due to a net exceptional gain of S$261 million from its disposal of a 70% stake in Australia Tower Network (ATN).

Meanwhile, overall revenue for the quarter was down 7.7% year-on-year S$3.91 billion on the back of lower national broadband network (NBN) migration revenue and lower Jobs Support Scheme credits.

In Australia, this NBN revenue of S$6.7 million in its latest quarter was under one-tenth the revenue it posted in the same period in 2020 S$69.6 million.

Some bright spots

Singtel did see some encouraging numbers among the many regional associate carriers that it has substantial stakes in.

For the third quarter of FY22, Singtel saw its regional associates’ profit before tax hit S$469 million, up 18% year-on-year on a constant currency basis.

A large portion of this increase came from Airtel, which saw an exceptionally strong quarter for its Africa business.

But uncertainty still clouding outlook

While there is lots of exciting talk about Singtel’s info-communications technology (ICT) division, that includes plans for data centres, the reality is that these are not substantial sources of revenue right now.

Plans to pursue digital banking opportunities and transform NCS (formerly known as National Computer Systems) into a regional B2B digital services platform are still in their infancy.

To highlight this, NCS revenue in Singtel’s latest quarter made up just 14% of overall operating revenue for the period. And even NCS revenue was down 1.3% year-on-year, suggesting it’s not yet a significant (or reliable) growth engine.

Then there’s Singtel’s loss of an appeal against a tax dispute in Australia late last year, which means the telco has now put aside over S$300 million for tax exposure expenses.

Can the Singtel dividend rise?

Despite the relatively stable core business of Singtel, which has at least stabilised following the darkest days of the Covid-19 pandemic, the question of whether its dividend is sustainable is still very much in the air.

In the first half of FY22, Singtel paid out a dividend per share of 4.5 Singapore cents –which was 76% of underlying net profit for the period.

While management guided for its full-year FY22 dividend payout ratio to be in the upper range of 60-80% of underlying net profit, I believe this is still too precarious.

That’s mainly because as at the end of H1 FY22 (30 September 2021), Singtel still had a whopping net debt of S$11.3 billion.

Additionally, with capital expenditure in new – highly uncertain areas – likely to weigh on its balance sheet over the next few years, I believe dividend investors should continue to steer clear of Singtel until there’s more clarity on both its financial and fundamental profiles.

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.

About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer. In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.