DBS Group Research analyst Sachin Mittal is keeping his “buy” call on Singapore Telecommunications Z74 (Singtel) at an unchanged target price of $3.39, as he expects a 10% y-o-y earnings before interests and taxes (ebit) growth in the company’s 2HFY2024 ending Mar 31 results.
In his Jan 26 report, the analyst remains upbeat on Singtel’s prospects, seeing two reasons to expect a rally, “finally”.
First, the telco enjoys the benefits of geographical diversification. Currently, Singtel is the number one integrated player in Singapore and owns the number two mobile player in Australia, as well as holding significant stakes in its telecom associates in India, Indonesia, Philippines, and Thailand, which contribute to over 67% of the group’s operating profit in FY2023.
In his Jan 26 report, Mittal notes that the company’s holding company (HoldCo) discount has expanded to a record 51% as its share price has not kept pace with its associates’ market value.
“The HoldCo discount has expanded from less than 15% in FY2018 to 51% as the share does not reflect the rise in the market value of its associates, especially Bharti. This can be explained by Singtel’s return on investment capital (ROIC) falling below its weighted average cost of capital (WACC) since FY2020 due to a sharp decline in core operating profit excluding associates over the last five years,” he explains.
The analyst expects the HoldCo discount to narrow to 20%, with a recovery in Singtel’s core operating profit led by annual cost-savings of $200 million over FY2023 to FY2026 and growth in the businesses of its IT-serving arm, NCS, and its data-centres.
Mittal adds that a divestment target of $6 billion at over 36 cents a share over FY2023 to FY2026 including associates “should uplift” ROIC and support a 90% payout ratio over the next three years.
On this he expands: “We project its ROIC to reach 7.2% in FY2024, exceeding a WACC of 7%. Singtel could also benefit from potential divestments and higher payout ratio of 90% in 2H2024F versus a 77% payout ratio in 1HFY2024.”
At the present, the analyst’s fair value for Singtel’s core businesses in Singapore and Australia is at 84 cents per share, at 5x FY2023 enterprise value (EV)/ earnings before interests, taxes, depreciation and amortisation (ebitda) as he adjusts the net debt position.
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Meanwhile, regional associates after a 20% HoldCo discount are worth $2.56 per share mainly due to a sharp rise in the market value of Bharti.
Key risks noted by Mittal include the Australian dollar’s further decline adversely impacting Singtel’s business in the country via Optus, as well as any irrational competition.
He writes: “Our base case assumes a gradual recovery in Optus’s operating profit.”
As at 11.55 am, shares in Singtel are trading at 3 cents higher or 1.251% up at $2.43.
