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DBS lowers TP on Singtel as core business trades at negative value

Samantha Chiew
Samantha Chiew • 2 min read
DBS lowers TP on Singtel as core business trades at negative value
Singtel's associates to support growth as core business trades at negative value
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DBS Group Research is keeping its “buy” recommendation on Singtel with a lowered target price of $2.69 from $2.85 previously. The research house has also dropped FY21/22 underlying earnings estimates by 18% and 6% respectively, due to weak Optus.

Optus is likely to witness a sharp dip in FY21 EBITDA with mild recovery in FY22, predicts analyst Sachin Mittal in a September 4 report.

Furthermore, Optus is likely to see an accelerated 5G capex spend compared to Singapore.

Australia’s leading telco, Telstra, just announced that it will be extending its 5G coverage to 75% of the population by June next year, from the current 33%. In lieu of this, it will be accelerating its 5G rollout and bringing forward A$500 million of capex into 2020, which was initially planned for 2H21. Hence, Telstra’s FY21 capex guidance is likely to rise from A$2.8-3.2bn to A$3.3-3.7bn and capex as a percentage of sales is projected to increase from 15% to 17% in FY21.

“As such, we believe that Optus will also accelerate its 5G rollout. We project Optus to incur FY21F capex of some $1.5 billion (previous estimate of $1.3 billion). Optus’s capex as a percentage of sales in FY21 now stands at 22% (versus 16% in FY20),” says Mittal.

Currently, the market value of SingTel’s associates is worth $2.49 per share, more than Singtel’s share price of $2.25. This implies that the market is assigning a negative value to its profitable core business in Singapore & Australia.

“Associates’ contribution should grow into FY21 led by Bharti, leading to further rise in associate value,” says Mittal.

After which, asset divestment is required for Singtel to unlock trapped value. It could divest assets worth 5 cents per share possibly - Optus towers followed by data-centre & digital business in 2-3 years.

Meanwhile, the analyst believes that Singtel’s 12.25 dividend per share with scrip dividend scheme in place, which represents a 5.3% yield, is “easily sustainable”. And If Singtel’s majority shareholder Temasek accepts scrip-dividends, Singtel’s net debt to EBITDA might improve to 1.8-2.0 times in FY22 from 2.4 times currently, easing any pressure on its credit-rating.

As at 12.50pm, shares in Singtel are trading at $2.25 or 1.4 times FY21 book with a dividend yield of 5.4%.

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