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Investors to benefit as Singtel's holding company discount rises to all-time high of 36% on Bharti's recovery: DBS

Uma Devi
Uma Devi • 3 min read
Investors to benefit as Singtel's holding company discount rises to all-time high of 36% on Bharti's recovery: DBS
While DBS analyst Sachin Mittal expects Singtel to post a 26% year-on-year decline in 4QFY2020 earnings to $518 million, he says an ‘attractive’ dividend yield of 5.6% is in store for investors.
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SINGAPORE (May 22): Although the Covid-19 pandemic is expected to last throughout 2020, analysts say Singtel investors are likely to reap attractive returns.

And this might just be the right time for investors to accumulate Singtel shares, as DBS Group Research notes that the telco’s holding company (HoldCo) discount has risen to an all-time high of 36% compared to a historical average of 16%.

DBS analyst Sachin Mittal says this is due to a combination of a 32% year to date increase in Singtel’s India associate Bharti Airtel’s share price, and a 20% decline in Singtel’s own share price.

In addition, Mittal opines the potential turnaround of Bharti, which began in FY2020, means Singtel could record compounded annual earnings growth (CAGR) of some 6% over FY2020-22F. He is expecting the telco to post a 26% year-on-year decline in 4QFY2020 earnings to $518 million.

“This should be driven by improvements in associates backed by lower losses from Bharti and earnings recovery from Globe,” says Mittal.

“This should offset some of the weakness in Australia and Singapore,” adds Mittal, noting that Australia could report a big drop in profits on the back of a “sharp sequential drop” of over A$80 million in National broadband Network (NBN) migration fees.

Singtel’s growth trajectory is likely to be buoyed by Bharti’s accelerated contributions in FY2021.

“Bharti should be the key driver as its average revenue per use (ARPU) rises from the 20-40% tariff hike effected in Dec 2019,” says Mittal, adding that Bharti is likely to contribute pre-tax profits of $169 million for FY2021 versus losses of $500 million in FY2020.

Globe Telecom’s results, too, picked up in FY2020 following a slump in the previous quarter due to rise in marketing, subsidy and provision-related costs. The way Mittal sees it, Globe should post a 47% quarter-on-quarter increase in earnings to $85 million.

On the flipside, the company’s largest earnings contributor Telkomsel is likely to book ‘flattish earnings’ for FY2021 due to a potential loss of market share outside the Java region, as well as cheaper data pricing.

Although Singtel’s current share price could cause some concern for investors, Mittal forecasts an ‘attractive’ dividend yield of 5.6% for the stock due to a potential decline in core EBITDA from its Singapore and Australia markets.

“The yield may compress to 4.5% (historical average over 15 years) if core EBITDA is firm, implying stable earnings and free cash flow at Singtel even if associates do not grow,” says Mittal.

In what Mittal terms a “bear-case valuation”, Singtel’s share price could drop to offer an all-time-high dividend yield of 6.2% based on a lower dividend per share (DPS) of 14 cents, due to sharp meltdowns in emerging markets.

In addition, Mittal notes that a rise in associate profits from 4Q2020 onwards, as well as potential divestments of non-core assets worth over $5 billion could translate into special dividends for Singtel investors in the medium term.

DBS Group Research is reiterating its “buy” call on Singtel with a higher target price of $3.22 from the previous $3.02, translating into a 20% upside for the counter. The company is also set to report its 4QFY2020 results on May 28.

As at 1.38pm, shares in Singtel are trading four cents lower, or 1.5% down, at $2.64. This indicates a price-to-earnings (P/E) ratio of 45.9 times and a dividend yield of 6.4% for FY2020 according to DBS valuations.

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