SINGAPORE (May 29): Analysts are remaining positive on Singapore Telecommunications (Singtel) despite the company’s results announcement yesterday, which recorded its lowest final year earnings since 1993 and a slash in dividends.

Singtel announced a 26% fall in 4Q20 earnings to $574 million from $772 million a year ago, on the back of a net exceptional charge of $302 million from Bharti Airtel’s provision for the spectrum charge.

4Q20 operating revenue fell 10% y-o-y to $3.90 billion from last year’s $4.34 billion due largely to the 6% depreciation in the Australian dollar. Earnings before interest, tax, depreciation and amortization (EBITDA) for the quarter declined 12% y-o-y to $1.03 billion.

This brings its full-year earnings to $1.08 billion, a 65% drop y-o-y due to Airtel’s exceptional charges of $1.80 billion on for regulatory costs.

Operating revenue for the year slid 4.8% y-o-y to $16.54 billion on the back of lower mobile service revenue and equipment sales, aggravated by the onset of COVID-19, as well as the weaker Australian dollar. EBITDA for the year dipped 3.2% to $4.54 billion on the weaker performance in Australia, low margins on equipment sales, and National Broadband Network (NBN) resale in Australia.

Singtel declared a final year dividend of 5.45 cents, bringing FY20 dividend to 12.25 cents, some 30% lower than FY19’s 17.5 cents. The FY20 dividend represents a 4.9% yield.

See: Singtel posts 26% fall in 4Q20 earnings; FY20 earnings plunge 65% to $1.08 bil on Airtel’s exceptional charges

Despite the lacklustre results, OCBC is reiterating its “buy” recommendation with a lower target price of $3.24 from $3.61 previously.

Singtel’s management highlighted that their preference is for a dividend policy that delivers sustainable dividends that grow with underlying earnings.

In a Friday report, OCBC says, “In the past, we understand that barring unforeseen circumstances, Singtel expected to maintain its ordinary dividends at 17.5 cents for FY19 and FY20, and thereafter revert to the payout ratio of between 60%-75% of its underlying profit. However, there has been no FY21 guidance given at this juncture.”

In the short-medium term, competition is still very much alive in 4G, but the commercial services launched by TPG Singapore is a good sign, given that it was giving out free services for more than a year.

Meanwhile, management is remaining optimistic on the recovery in Australia and believes it is in a strong position to take market share in a profitable manner.

DBS Group Research also has kept its “buy” call on Singtel with a target price of $3.09 from $3.22 previously.

In a Friday report, analyst Sachin Mittal says, “We expect the stock to re-rate to 4.5% yield while asset-divestment might unlock the trapped value.”

“We estimate NBN fee in Australia to drop by about $300 million in FY21. We project FY21 DPS of 12.25 cents in FY21 as this should allow net debt-to-adjusted EBITDA (core EBITDA plus associate dividends) to fall from 2.2 times in FY20 to 2.0 times in FY22 even without any asset divestment,” says Mittal.

Nonetheless, the analyst expects Singtel’s associates’ recovery to accelerate further into FY21, pushing Singtel into growth territory. Mittal expects Bharti to be Singtel’s growth driver as its average revenue per use (ARPU) rises from the 20-40% tariff hike effected in Dec 2019. He projects Bharti to contribute $173 million in pre-tax profit for FY21, compared to FY20’s losses.

CGS-CIMB Research continues to rate Singtel “add” with no change in its $3.40 target price, after rolling forward the DCF-base year and updating for higher consensus fair value for Bharti.

In FY20, associate earnings turned the corner with the highest contribution in two years, led mainly by improved performance at Bharti and Telkomsel. Bharti managed to narrow losses by 58.3% y-o-y, while Telkomsel saw 10.6% y-o-y earnings growth. This more than helped to offset lower earnings at AIS and other associates, which saw 7.5% and 27.5% declines respectively.

In a Friday report, CGS-CIMB analysts Foong Choong Chen and Sherman Lam say, “After three years of declines, we see earnings recovery from FY21 as a potential re-rating catalyst and decent 4.7-6.2% yields per annum in FY21-23 (75% payout). Its FY21 EV/OpFCF of 15.7 times is at a 5% premium to the ASEAN telco average and roughly in line with its 12-year mean.”

As such, RHB Group Research is reiterating its “buy” recommendation on Singtel with a higher target price of $3.40 from $3.30, after rolling forward its base year and updating key associates’ valuations.

In a Friday report, RHB's Singapore research team says, “FY20 core earnings were in line, with Covid-19 impact buffered by cost savings. We expect core earnings to rebound in FY21, driven by stronger associate contributions and further cost-outs.”

However, RHB believes that the full impact from Covid-19 will be largely felt by Singtel in the second quarter of 2020. “We expect the full brunt of roaming revenue weakness from lockdowns imposed globally (including Singapore) to be felt 2Q20,” says RHB.

As for the extended lockdown in India, RHB believes that it may crimp revenue momentum in 1Q21 due to the high dependence on traditional recharge methods.

Management has not given a guidance for FY21 as it notes that uncertainties surrounding the Covid-19 pandemic still looms.

As at 2.40pm, shares in Singtel are trading at $2.48 or 1.5 times FY21 book with a dividend yield of 5.3%, according to RHB’s estimates.