SINGAPORE (Mar 21): UOB Kay Hian is maintaining its “buy” call on Singtel with a target price of $3.58, while highlighting that the stock, at the price of $3.02, is currently below its mean EV/EBITDA with a 5.8% dividend yield.

In a Thursday report, analyst Chong Lee Len says she continues to like Singtel for its customer-centric offerings and diversification across the region, as well as lean cost structure.

While she expects Singtel’s consumer revenue to continue contracting into 2019 due to lower roaming revenue and shift towards SIM-only plans, the analyst notes that its digital businesses and ICT services have grown rapidly over FY18 to register three-year revenue CAGR of 61% and 8%, respectively, driven by cyber security services, smart nation prospects and cloud services.

“Cost rationalisation exercise for the group will continue into 2019 as the company renegotaties lump sum contracts. In addition, digitisation of the core business will also help to keep a lean talent force, especially for Optus,” says Chong.

While its industry rival TPG Telecom has achieved outdoor coverage of 95% and aims to achieve in-building coverage targets by end-2020, the analyst believes TPG will only launch full commercial services by 2Q19 “at best” considering how the rollouts have been slow.

As such, she thinks competition from TPG will only intensify by end 2019, with Singtel being better positioned to weather such competition given its well-diversified portfolio of investments.

“Mobile business in Singapore accounts for only 7% of [Singtel’s] group revenue if we include its proportionate share of its associates’ revenue,” says Chong.

“The ICT and digital businesses will be drivers for the company, albeit accounting for only 21% of group revenue. The subscription of Airtel rights issue will not derail Singtel from its mandate to pay out dividends of 17.5 S cents per year for FY19 and FY20,” she adds.

Shares in Singtel last traded 0.33% lower at $2.98 before the midday break, implying 1.57 times FY19F book value.