Morningstar analyst Dan Baker has somewhat reversed his previously conservative stance on Singapore Telecommunications Z74 , raising his fair value for the counter slightly from $3.37 to $3.46, along with his four-star rating.
Just over a month ago, Baker downgraded Singtel's moat rating to no-moat mainly because of Optus' poor profitability, which has averaged operating profit of $240 million per year over the past four years at an estimated return on invested capital of under 2%.
In his most recent note on Dec 3, Baker observes that for the first half ended September, Optus increased ebitda by 7.4% with revenue up 4.1%, while costs were cut by A$80 million.
This helped drive the telco's underlying net profit by 6% y-o-y and ebitda up 9% y-o-y in its 1HFY2025 ended Sept, despite flat revenue.
"We see this as a good start to recovery and should be helped by mobile price rises taking effect in early September, but it is a long way from returning the cost of capital.
He notes that while Singtel's domestic Singapore mobile revenue was up 4.1%, the growth was offset by declines from various fixed-line revenue streams.
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"Mobile competition remains high in Singapore with speculation about potential consolidation," says Baker.
His higher fair value of $3.47 takes into account better forecasts for Optus and Singapore domestic businesses, which should more than offset a 3% reduction in the value for its associates based on updated share prices.
"At current prices, we see Singtel as slightly undervalued," says Baker.
Singtel shares changed hands at $3.16 as at 10.28am, up 0.96%.
