Analysts are overall bullish on Singtel despite the telco reporting a 24% y-o-y decline in earnings before interest, taxes, depreciation, and amortisation (EBITDA) to $897 million in its latest 1Q21 business update.

This is after including some $17 million of Jobs Support Scheme credits from the Singapore government. The fall in earnings was mainly a result of a 13.9% y-o-y decline in operating revenue to $3.54 billion, mainly due to “challenging market conditions” due to the Covid-19-induced shutdowns across Singapore and Australia.

The lower numbers were attributed to travel and movement restrictions, lower footfall in retail stores, and a general dampening in consumer and business spending amid the global economic slowdown.

During the quarter, Singtel also booked a net exceptional charge of $364 million compared to the $34 million in 1Q19. The charges mainly comprised Singtel’s share of its associate in India, Bharti Airtel’s additional provisions for the adjusted gross revenue matter following the Supreme Court of India’s decision in July and exceptional tax charges.

See: Singtel reports 24% decline in EBITDA to $897 mil, registers net exceptional charge of $364 mil in 1Q business update

Including Singtel’s associates, underlying EBITDA for 1Q21 came in at $1.3 billion, which according to DBS Group Research is 12% below street estimates due to weak Telkomsel and accounting adjustment for Bharti.

DBS has kept its “buy” call on Singtel with a lowered target price of $2.85 from $3.04 previously.

Singtel’s investment in its associates, based on their market values, is worth $2.50 per share, which is more than Singtel’s current share price of $2.34. This implies a negative value for its core business in Singapore and Australia.

In an August 18 report, analyst Sachin Mittal says, “The value of associate investments is likely to rise from potential turnaround of Bharti in FY21. While the core business is not doing well, its true value can be unlocked via asset divestments - Optus towers worth 10-11 cents per share in the near term, followed by other divestments in the medium term.”

The analyst has projected FY21 dividend per share (DPS) of 12.25 cents, translating into an 87% payout ratio and 85% of free cash flow, which he believes is sustainable in the long term. He expects Singtel to rerate to 4.5% yield (15-year historic average) in a low-interest environment.

OCBC Investment Research also continues to rate Singtel a “buy” but has dropped its fair value estimate to $3.08 from $3.24 previously.

On the consumer front, reduced travel and lower footfall in retail stores put a dent on Singtel’s roaming and prepaid mobile revenue and equipment sales especially in Singapore and Australia. Group Enterprise saw operating revenue fall 4.5% y-o-y to $1.4 billion, with certain ICT projects being deferred or delayed.

However, OCBC is positive on Singtel’s associates. “We are encouraged by Airtel’s lower net operating loss due to higher mobile average revenue per user (ARPU) in India with the price up last December, and this has mitigated declines from other regional associates. Despite this soft set of results, we remain constructive on Singtel as its valuations are not demanding, while FY21 yield of 5.3% (at time of writing) should help cushion further downside,” says OCBC.

RHB Group Research shares the same sentiments as it maintains its “buy” recommendation with a target price of $3.20 from $3.40 previously.

Although FY21 results were below expectations, RHB believes that Singtel’s outlook is still rosy. “With the gradual lifting of population restrictions from 2Q20, we expect underlying consumer revenue momentum to show some improvement going forward,” it says.

As for the group’s enterprise segment, recovery is expected to be further pushed back due to cautious spending and macroeconomic challenges.

Overall, RHB has cut FY21-23 core earnings by 12-14% after factoring in a weaker EBITDA run-rate and the extended earnings recovery. At -1.5SD from its historical EV/EBITDA mean, valuation has priced in downside risks and is backed by “attractive dividend yields”.

Similarly, CGS-CIMB Research is reiterating its “add” recommendation with a lowered target price of $3.10 from $3.40.

Lead analyst Foong Choong Chen says that Singtel’s disappointing 1Q21 shows that the Covid-19 impact was more severe than expected.

“We cut FY21-23 core EPS by 6-38%, mainly to reflect: extended Covid-19 impact on Singtel’s and Optus’s Consumer, Enterprise and Digital Life businesses until mid-CY21, and more bearish earnings forecasts for Bharti (based on consensus) and Telkomsel, the latter due to more intense competition,” adds Foong.

He also expects FY21 EPS to fall by 35% y-o-y, before staging a rebound in FY22/23 as the Covid-19 impact subsides and Bharti’s/Telkomsel’s contributions improve. Keeping to a 75% payout ratio assumption, FY21-23 DPS is lowered to 7-15 cents.

PhillipCapital is slightly less upbeat than consensus as it has kept its “neutral” rating on Singtel with a target price of $2.44.

“We do not see a turnaround in the results until international travel resumes materially for roaming revenue to recover,” says analyst Paul Chew in an August 19 report.

Furthermore, Optus needs to complete its NBN transition and remove the significant cost of running its existing broadband network to expect any recovery. Without NBN, Australia consumer EBIT fell an incredulous 82% y-o-y to A$41 million.

The analyst believes that weakness was across all segments in Australia with broadband bearing the brunt. While being burdened by high operating costs, Optus also experienced a 65% y-o-y decline in on-net broadband subscribers.

On the outlook, Chew sees Singapore mobile and Australia broadband to be Singtel’s two main pressure points. He expects at least another two more quarters of weak y-o-y operating performance from the group.

As at 12.45pm, shares in Singtel are trading at $2.34 or 1.5 times FY21 bok with a dividend yield of 5.1%, according to DBS’ estimates.