RHB Group Research is staying “neutral” on Singapore’s telecommunications sector as its risk-reward profile is balanced, after the sharp correction in 2020.

In a Jan 12 report, the research house says, “We expect competition to remain intense in 2021, with industry mobile revenue set for a progressive recovery from easing Covid-19-related restrictions and a pick-up in economic activities.”

RHB expects industry mobile revenue to show a stronger recovery under Singapore’s Phase 3 reopening. 

In 3Q2020, industry mobile revenue (the combination of Singtel, StarHub and M1) declined by a slower 1.3% q-o-q and 22% y-o-y after the 11.4% q-o-q drop in 2Q2020 – due to the pick-up in economic activities during Singapore’s Phase 2 reopening.

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“We see a stronger recovery in industry mobile revenue from 4Q2020 onwards, as economic activities gather pace under the Phase 3 reopening. Overall, we expect industry mobile revenue to decline by a sharp 24% y-o-y in 2020, before stabilising somewhat in 2021 on account of the bottoming-out of roaming and prepaid revenues,” says RHB.

On the other hand, the market may seem upbeat on the prospects of 5G, but RHB has a rather muted view on it. “We do not see 5G as a game-changer, with a measured increase in retail market adoption as consumer-use cases are still scarce. Key risks are competition and the monetisation of 5G services,” it says. 

5G is still rather new in the market and services are only set to go live on the industry-favoured/preferred 3500MHz band by mid-2021, with Singapore being the earliest of the ASEAN-4 markets to roll out full standalone (SA) networks.

While the jury is still out on 5G monetisation, SingTel and StarHub are fairly optimistic on the prospects for ARPU accretion, judging by the positive reception and consumer appetite to their trial services over the past four to five months, where nominal surcharges were imposed over current 4G services.

Amid dwindling consumer revenue, RHB sees the enterprise segment as a key industry growth driver in 2021-2022 for the telcos. “We see corporate digitalisation initiatives and demand for hosted connectivity services (cloud and cyber-security) solutions in the new normal/post pandemic period driving good enterprise gains for the telcos,” says RHB.

In 3QFY2020, StarHub’s enterprise revenue grew by 13.5% q-o-q due to the maiden contribution from newly-acquired Strateq (from Jul 2020) and stronger demand for cyber-security services (Ensign). 
Similarly, Singtel’s enterprise business gained 7% q-o-q in 3QFY2020 on higher system infrastructure and cloud jobs, off a 2QFY2020 low. 

To that end, RHB has Singtel as its top pick. It has a “buy” call on Singtel with a target price of $3.10. 

The group saw its first leadership change recently in 13 years, in what appeared to be a ‘turning point’ – with the unprecedented pandemic pummelling its share price to over a decade low in 2020. 

SEE: Singtel and Ericsson to deploy high-end 5G connectivity in Singapore

“We view its recent transformation exercise positively – most notably, the transfer of international operations under the Group CFO’s office and the creation of NCS as an autonomous unit. This should provide stronger oversight on the performance of its associates, strengthen capital management prospects, and unlock the value of core investments,” says RHB. 

Furthermore, as a recipient of one of two digital full bank licenses (DFB), SingTel stands to benefit from new financial revenue streams, with good upselling opportunities across its extensive customer base in the longer term. 

Valuation-wise, it is trading at 0.5 standard deviation (SD) above the historical EV/EBITDA mean, supported by decent forward dividend yields of over 4% and superior FY2022 core earnings growth of 11%. 

Meanwhile, RHB has kept its “neutral” recommendation on StarHub with a target price of $1.30. 

As at 3.50pm, shares in Singtel are trading at $2.47, while shares in StarHub are trading at $1.34.