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Maybank Kim Eng starts Singapore telco sector at 'buy' on earnings recovery; identifies Singtel as top pick in sector

Felicia Tan
Felicia Tan12/2/2020 03:46 PM GMT+08  • 3 min read
Maybank Kim Eng starts Singapore telco sector at 'buy' on earnings recovery; identifies Singtel as top pick in sector
The brokerage has also initiated 'buy' on Singtel and 'hold' on StarHub with TPs of $2.88 and $1.32 respectively.
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Maybank Kim Eng has initiated coverage on the Singapore telco with a “positive” call.

Analyst Kareen Chan believes the worst is over for the sector and that it should gradually see recovery returning to its pre-Covid-19 levels.

“Singapore telcos have fallen 8-27% y-t-d, reflecting the earnings impact from Covid-19. Competition in the mobile segment appears stable and 5G average revenue per user (ARPU) uplift could come as early as end-2021,” Chan says in a Nov 30 report.

“Valuations are undemanding and dividend visibility is improving,” she adds.


See:Singtel bets on associates' track record to fulfil digital banking dreams

On this, the brokerage has also initiated “buy” on Singapore Telecommunications (Singtel) with a target price of $2.88; “hold” on StarHub with a target price of $1.32 and likes Netlink NBN Trust for its dividend visibility.

The way Chan sees it, the telco sector could see earnings recovery on several fronts, including pre-paid and post-paid ARPUs normalising with the lifting of travel restrictions in 2021.

She also sees the telcos’ market share as “stable” despite competition from Mobile Virtual Network Operators (MVNOs).

On that, Chan says she prefers Singtel for its geographical diversification.

She adds that the market consolidation in Australia following the merger of Vodaphone and TPG as well as Telstra’s recent price hike suggests a “favourable shift”.

In India, Singtel’s associate Bharti is set for an APRU upcycle.

Thus, she expects Singtel’s and StarHub’s earnings to grow at a three-year compound annual growth rate (CAGR) of 12.2% and 2.6% for 2021 and 2022.

The commercialisation of the 5G network could also lift the telcos’ “long-depressed” APRUs, says Chan.

“We are seeing 13-19% price hikes in 5G plans offered by telcos. The availability of 5G non-standalone (NSA) coverage and 5G handsets should drive uptake of new 5G plans,” she says.

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“We project 5G adoption rate of 15% by end-2021, lower than 3G/4G adoption rate of 24%. This would provide telcos with 1.9-2.8% ARPU lift as early as end-2021, we estimate. 5G should also allow incumbents to reset price competition with MVNOS by renegotiating wholesale prices.”

To this end, Chan has identified Singtel as her top pick on valuation grounds.

“The market is ascribing almost zero value to its core operation, and the stock is supported by forward 12-month dividend yield of 5.1%, in line with 10-year historical mean,” she says.

“This is followed by NetLink for clearer dividend visibility given 94% of its revenue is secured by recurring cash flows. For StarHub, we suggest wait for a better entry point as its forward yield of 4.9% is unappealing vs its 10-year historical yield support of 6.3%,” she adds.

As at 3.44pm, shares in Singtel, StarHub and Netlink are trading at $2.32, $1.29 and 96.5 cents respectively.

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