Singtel Ready for Next Growth?
Optus wins a contract worth AUD 578m.
In case you missed it:
Optus Enterprise, a subsidiary of the telecommunications conglomerate Singtel, has secured a lucrative contract worth a staggering AUD578 million from Services Australia. This contract, which is set to commence in June 2024, will task Optus with providing customer contact management services for a duration of 6 years. This agreement represents a major coup for Optus, as it capitalizes on the company's existing infrastructure and expertise to deliver a critical service to the Australian government.
What is Happening?
Services Australia is the government agency responsible for operating the country's largest contact center, handling an astounding 1 billion online transactions and 55 million calls annually. By awarding this sizeable contract to Optus, the agency is entrusting the company to leverage its robust physical and cloud/software infrastructure to deliver seamless customer service. Importantly, this arrangement is expected to require limited additional capital expenditure or operating expenses for Optus, as the company can efficiently utilize its existing resources.
Why Does it Matter?
This new contract is poised to have a significant impact on Optus' financial performance in the coming years. Assuming a modest ramp-up in revenues over the contract's lifetime and a healthy 40% EBITDA margin, the analysts estimate that the contract will lift Optus' Profit After Tax (PAT) by a substantial 15-39% for the fiscal years 2025 to 2027. At the Singtel group level, the contract is projected to contribute an increase of 0.7-1.4% to the company's earnings, free cash flow, and sum-of-the-parts valuation over the same period.
What are the Potential Risks:
While the Optus Enterprise contract presents a compelling opportunity, Singtel and its subsidiary Optus are not without their fair share of potential risks. These include the possibility of delays in the Optus restructuring process, the threat of fines for any network outages, the risk of intensifying price competition in Singtel's markets, and the lingering challenge of foreign exchange headwinds impacting Optus and the company's associates.
Summary:
The Optus Enterprise contract with Services Australia represents a transformative win for Singtel, as it is expected to provide a material boost to the company's financial performance over the next few years. The contract aligns perfectly with Singtel's strategy of leveraging its existing infrastructure and expertise to drive growth, and the potential benefits far outweigh the identified risks.
Disclaimer: This article constitutes the author’s personal views and is for entertainment and educational purposes only. It is not to be construed as financial advice in any form. Please do your own research and seek advice from a qualified financial advisor. From time to time, I have positions in all or some of the mentioned stocks when publishing this article. This is a disclosure - not a recommendation to buy or sell stocks.