How Singtel’s stake in Airtel caused Q1 profits to fall 23%

The topsy-turvy impact of holding a 24.5 per cent stake in Airtel came home to the roost as Singtel, Singapore’s dominant telco operator, reported its first-quarter results last week.

Singapore Telecommunications (Singtel), Southeast Asia’s largest telecom operator, reported a 23.1 per cent slide in profit for the quarter that ended in June 2023 with net profit coming in at Singapore Dollar (SGD) 483 million (USD356 million) compared to SGD628 million in the same quarter a year ago.

In the previous financial year, the company’s net profit was boosted by a post-tax dilution gain of SGD239 million (USD 176 million) on its Airtel stake. Last year, it reduced its effective equity interest in Airtel from 31.4 per cent to the current 24.5 per cent.

In Q1 of this financial year, SingTel recorded a total exceptional loss of SGD114 million due to its ownership of Airtel. This consisted of SGD62 million loss which is its share of Bharti Airtel’s losses from its ownership of Airtel Networks Limited of Nigeria as a result of the steep devaluation of the Nigerian naira against the US dollar. Singtel also took a charge on the fair value loss of SGD52 million from Airtel’s foreign currency convertible bonds.

Overall, Singtel reported a total net exceptional loss of SGD88 million versus an exception gain of SGD129 million a year ago. In this reporting quarter, the sale of Globe’s (Philippines) telecommunications towers contributed a one-time gain of SGD18 million to Singtel whereas in the last corresponding quarter, an exceptional net gain of SGD 84 million was recorded from the dilution of the Group’s effective shareholding in Indara Corporation Pty Ltd (formerly known as Australia Tower Network Pty Ltd) from 30 per cent to 18 per cent.

Excluding exceptional items, net profit for the quarter increased 14.5 per cent to SGD 571 million (USD421 million). This was aided by lower net finance expenses and a higher share of profits from Airtel, and Thai associates AIS and Intouch. On a constant currency basis, underlying net profit would have increased 20 per cent.

Operating revenue fell 2.7 per cent from SGD3.6 billion to SGD3.5 billion due to its Australian business. Operating revenue from wholly owned Australian telco Optus, dropped 8.2 per cent from SGD 1.9 billion to SGD1.8 million due to a 9 per cent decline in the Australian dollar against the reporting currency, the Singapore dollar.

Optus actually performed reasonably well given challenging market conditions from competitive pricing and weakening consumer sentiment with operating revenue in local currency rising 1.1 percent. However, operating expenses rose faster due to high inflation and a spike in energy costs resulting in EBITDA (earnings before interest, taxes, depreciation, and amortization, a measure of operational profitability) falling 5.5 per cent to SGD456 million.

In constant currency terms, operating revenue would have been up 2.5 per cent, led by higher revenues from information and communication technology subsidiary NCS, and infrastructure and digital unit InfraCo which provides datacentre services, and subsea cable and satellite carrier services.

"Underlying net profit grew 15 per cent in the first quarter despite prevailing macroeconomic challenges and currency headwinds. Our growth engines, NCS and Digital InfraCo executed well, roaming recovery stayed strong across our consumer and enterprise businesses, and we’ve lowered net finance expenses significantly with the proceeds from our capital recycling initiatives,” said Singtel group chief executive Yuen Kuan Moon.

The telco’s net finance expense fell 54 per cent from SGD114 million a year ago to SGD52 million due to a rise in interest income and a revaluation loss in the same quarter last year from a derivative that has since expired. Interest income was boosted by higher interest rates and increased holdings of fixed deposits and Singapore treasury bills after asset recycling last year.

In its home market Singapore, Singtel’s operating revenue fell 1.8 percent due to a continued decline in legacy carriage services and intense price competition in mobile amid a shift in the market to lower-end plans. The declines in international data, pay TV and voice were partly mitigated by higher mobile service revenue. Postpaid revenue was boosted by higher roaming as international travel continued to recover. Prepaid revenue was stable as the increases in the foreign customer base and data usage were offset by lower prices and IDD. Pay TV revenue was lower following its loss of the English Premier League (football) broadcast license, but the impact was offset by lower content costs.

Singtel’s regional associates' profit contributions, including Airtel, were negatively impacted by the depreciation of the regional currencies which ranged from 3 per cent to 9 per cent. In constant currency terms, post-tax contributions would have risen 10 per cent due to the strong operational performance of Airtel, AIS and Intouch.

In its quarterly business update to shareholders, Chief Executive Yuen commented, “While we saw better performances and higher contributions from our regional associates as market dynamics improved, increased competition and continued declines in legacy services impacted our core telco business in Singapore and Australia. Our focus on cost has helped to reduce some of the effects of the difficult operating environment.”

“Going forward, we expect the integration of our core consumer and enterprise businesses which is underway in both Singapore and Australia, as the next step in our strategic reset, to optimise synergies, help deliver cost benefits and drive growth,” he added.