DBS Group Research analyst Sachin Mittal has maintained his “buy” call on Singapore Telecommunications (Singtel) with a higher target price of $2.93 from $2.75, as he believes the market is currently undervaluing the counter.

To him, Singtel’s core business is trading at 55%, below his fair value of 58 cents per share, from 46 cents previously.

“The market value of Singtel’s associates is $2.18 per share after factoring in a 10% holding company discount. Singtel’s current share price implies that the market is valuing its core business in Singapore and Australia at only 25 cents compared to our fair value of 58 cents per share,” he writes in a May 25 report.

“We value its regional associates at $2.35 per share (previously $2.29) after factoring in a 10% holding company discount. We raise our fair value of Bharti to Rs630 per share (previously Rs620),” he adds.

In the same report, Mittal has estimated Singtel to report an underlying profit of $1.02 billion for the 2HFY2021, up 22% q-o-q led by subsidiaries Bharti Airtel and Optus.

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SEE: FY2022 is a new dawn for Singtel

The earnings estimates, says Mittal, are 14% below consensus estimates, as he factors in “potential losses on equipment sale, a big drop of $300 million in National Broadband Network (NBN) migration fee at Optus and lower than expected contribution from Telkomsel [which]  are expected to weigh on Singtel’s FY2022 earnings”.

He has also projected FY2021/2022 dividend per share (DPS) of 10.9 cents and 11.5 cents based on a 100% and 90% payout ratio respectively.

“Singtel’s net debt-to-EBITDA can improve to 1.8-2.0 times in FY2022 from 2.4 times currently, easing any pressure on its credit rating,” he writes.

Singtel will release its 2HFY2021 and FY2021 results on the morning of May 27.

Potential catalysts on the counter include the resumption of earnings growth in FY2022 from the stabilisation of core EBITDA in FY2022, after a 23% decline in FY2021, as well as a sharp rise in associates’ profits led by Bharti.

“Singtel could divest [its] assets – Optus’ towers in the near term followed by others, which should help to sustain dividends in the long term, and unlock trapped value based on true market value of those assets,” adds Mittal, on potential catalysts to Singtel’s share price.

That said, he has also projected a bear-case valuation of $2.

“Under this scenario, we assume that Singtel’s share price could drop to offer a 5% yield based on a 10-cent DPS assuming 75% earnings payout ratio of our FY2022 earnings forecast,” he writes.

Shares in Singtel closed 2 cents higher or 0.8% up at $2.46, or 155.0 times P/B, according to DBS’s estimates.