SINGAPORE (Feb 8): RHB is upgrading Singtel from "neutral" to "buy" with unchanged target price of $4.10 after its share price hit a 52-week low over the past two weeks on broader market weakness and worries over inflationary expectations in the US.

Year to date, Singtel has underperformed relative to its domestic peers and the benchmark STI Index. The stock is trading at 10 times FY18F EV/EBITDA, below its 12 times five-year historical mean, with share price supported by its diversified regional exposure and attractive FY18 dividend yield of 6%.

In a Thursday note, RHB says Singtel’s 9M18 ended Dec results which were announced this morning came in line with its expectations, backed by stronger showing at wholly-owned subsidiary Optus but offset by weaker associate contributions and the tight competition in Singapore.

<hr/><a href="https://www.theedgesingapore.com/singtel-posts-85-decline-3q-earnings-890-mil-lower-contribution-associates" target="_blank">See: Singtel posts 8.5% decline in 3Q earnings to $890 mil on lower contribution from associates</a><hr/>

During the quarter, Optus posted strong EBITDA on record postpaid subscribers. Consumer EBITDA surged 15% y-o-y on record postpaid subscriber addition and higher national broadband network (NBN) migration payments.

With the addition of 125,000 postpaid subscribers, mobile service revenue was up 4%, the strongest since 3Q16. Optus’ 4G mobile coverage reached 96.6% with 6,583 4G sites, 84% of this on the superior 700 MHz band.

However, Singapore was hit by higher handset subsidies and lower enterprise revenue.

Consumer mobile revenue was down 3.3% y-o-y on continued lower usage and roaming revenue and dilution from SIM-only plans. EBITDA fell a sharper 9% y-o-y on lower revenue and seasonally higher handset subsidies from iPhone 8/X sales.

Enterprise revenue fell 3% y-o-y from the phasing of projects and lumpy sales in the preceding quarter, although EBITDA was steady on tight cost management.

Meanwhile, Singtel managed to pare down losses in its digital life unit. Higher content investments for Hooq partially offset the strong growth at Amobee, the digital mobile advertising arm. 9M18 EBITDA loss of $52 million looks to be trending below the guidance of $100 million loss for FY18.

Pre-tax profit contributions from associates of 18% were impacted by tight competition in Indonesia and India. Regional mobile associates in SGD terms fell for the second straight quarter by 16% with the key drags from Telkomsel and Airtel but partly mitigated by Advanced Info Service (AIS).

With the Feb 28 deadline looming for the prepaid registration exercise in Indonesia, this has triggered a fresh round of aggressive market share grabbing by telcos in 4Q17.

Over in India, competition remains intense, with pressure on revenue and earnings further exacerbated by the cut in domestic interconnect usage charge (IUC), which took effect in Oct 2017.

As at 11.41am, shares in Singtel are down 4 cents to $3.40 or 14.2 times FY18 forward earnings.

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