Investments In 5G And Smart ICT Will Drive Future Opportunities In Healthcare And Sustainability

Key Takeaways

• Strong 5G and smart ICT segment growth imply increased revenues and margins as customer base expands in high-margin areas.
  
• Digital and sustainability initiatives drive new revenue streams and margins with investments in healthcare, smart cities, and environmental projects.
  
• Heavy reliance on merger synergies and external factors for growth could obscure slow organic business growth and introduce risks affecting revenue sustainability.

Catalysts

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

• The merger with APT has already yielded significant EBITDA synergies ahead of expectations, including OpEx savings and revenue uplift from customer migrations, suggesting further improvements in net margins and earnings as these efficiencies continue to develop.
  
• Far EasTone's postpaid 5G penetration and mobile service revenue growth are strong, with 16 consecutive quarters of positive year-over-year growth, indicating a sustained increase in revenue from expanding their customer base in higher-margin segments.
  
• The company's smart ICT business, including cloud services and AI-driven solutions, is experiencing strong demand with double-digit year-over-year growth in contract value and enterprise clients, which could lead to substantial revenue and margin expansion in the future due to high-margin service offerings.
  
• Investments in digital transformation and health expansion, such as cloud-based telemedicine solutions, offer potential new revenue streams and margin improvements as regulatory changes increase the total addressable market for these services.
  
• Developments in smart city and environmental sustainability projects, such as smart metering and public EV charging, are set to capitalize on increasing government and enterprise demand, potentially resulting in substantial revenue growth and improved margins through long-term contracts and recurring service models.

Far EasTone Telecommunications Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Far EasTone Telecommunications's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.8% today to 13.9% in 3 years time.
• Analysts expect earnings to reach NT$16.3 billion (and earnings per share of NT$4.63) by about December 2027, up from NT$12.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.0x on those 2027 earnings, down from 27.0x today. This future PE is greater than the current PE for the GB Wireless Telecom industry at 11.5x.
• Analysts expect the number of shares outstanding to decline by 0.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.93%, as per the Simply Wall St company report.

Far EasTone Telecommunications Future Earnings Per Share Growth

Risks

• The company's revenue achievement fell slightly short of guidance due to a faster than expected drop in iPhone prices and the decision not to adjust handset-only sales, which could impact future revenue growth.
  
• The number of shares has increased by 10% due to the merger, potentially diluting Earnings Per Share (EPS) even though earnings have performed well against guidance.
  
• Despite achieving merger synergies ahead of schedule, reliance on these synergies for EBITDA growth may mask underlying slow growth in organic business areas, affecting long-term revenue sustainability.
  
• Capital expenditures were slightly lower than guidance due to delays in payment timing, which could influence future operational capabilities and growth investments.
  
• The company's future growth initiatives, such as cloud health services, depend heavily on regulatory changes and government programs, introducing risks that could affect revenue and earnings if these external factors do not progress as expected.

Valuation

• The analysts have a consensus price target of NT$100.0 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$84.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be NT$117.2 billion, earnings will come to NT$16.3 billion, and it would be trading on a PE ratio of 25.0x, assuming you use a discount rate of 4.9%.
• Given the current share price of NT$90.0, the analyst's price target of NT$100.0 is 10.0% 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.