Focus On 5G And AI Will Improve Future Operational Efficiency

Key Takeaways

• Strategic 5G expansion, merger synergies, and ICT projects boost revenue growth and operational efficiency, enhancing EBITDA and net margins.
  
• Diversification into Smart Cities and AI adoption increases revenue opportunities and efficiency, improving long-term growth and financial performance.
  
• Rising utility costs and decreased CapEx spending, alongside increased competition and slower growth, might challenge revenue and earnings stability.

Catalysts

Engages in the provision of telecommunications and digital application services in Taiwan.

• Far EasTone's strategic focus on expanding 5G capabilities and leveraging merger synergies is expected to continue driving revenue growth, particularly through increasing postpaid 5G penetration and migrating former APT customers. This should positively impact their top-line revenue.
  
• The company's initiatives in the new economy sector, especially within the ICT space, are expected to bolster EBITDA and net margins through selective project acquisition and a focus on margin improvement, indicating operational efficiency.
  
• Far EasTone's expansion into Smart City, Smart Health, and Digital Transformation sectors presents significant future revenue streams, particularly as government subsidies and projects provide new business opportunities. This diversification is likely to impact revenue positively and support long-term growth.
  
• The reduction in CapEx and realization of cost synergies from the merger are likely to enhance free cash flow and profitability, contributing to improved net income and EPS growth in the near term.
  
• The focus on artificial intelligence (AI) adoption to enhance internal processes and external service offerings is expected to increase operational efficiencies, reduce costs over time, and subsequently improve net margins and overall financial performance.

Far EasTone Telecommunications Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Far EasTone Telecommunications's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.3% today to 13.1% in 3 years time.
• Analysts expect earnings to reach NT$15.7 billion (and earnings per share of NT$4.48) by about March 2028, up from NT$12.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.0x on those 2028 earnings, up from 25.6x today. This future PE is greater than the current PE for the GB Wireless Telecom industry at 25.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.19%, as per the Simply Wall St company report.

Far EasTone Telecommunications Future Earnings Per Share Growth

Risks

• The anticipated increase in utility costs, particularly in power usage, may offset the synergy savings, potentially impacting net margins and net income growth.
  
• The reduction in CapEx spending, which includes deferred payments, might affect future infrastructure development and long-term revenue growth.
  
• The organization's growth rate is expected to slow due to the absence of merger-driven expansion, which could lead to lower revenue and earnings growth compared to previous years.
  
• Competition remains a concern, as evidenced by the decreasing ARPU, and maintaining a low churn rate, which could challenge revenue stability.
  
• External economic conditions, such as government budgeting decisions impacting utility costs, could strain operating expenses and affect earnings projections.

Valuation

• The analysts have a consensus price target of NT$100.833 for Far EasTone Telecommunications based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$105.0, and the most bearish reporting a price target of just NT$89.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$119.3 billion, earnings will come to NT$15.7 billion, and it would be trading on a PE ratio of 27.0x, assuming you use a discount rate of 5.2%.
• Given the current share price of NT$91.1, the analyst price target of NT$100.83 is 9.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.