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UOB Kay Hian remains 'cautiously optimistic' on Singtel amid headwinds

Uma Devi
Uma Devi12/9/2019 04:51 PM GMT+08  • 4 min read
UOB Kay Hian remains 'cautiously optimistic' on Singtel amid headwinds
SINGAPORE (Dec 9): UOB Kay Hian is maintaining its “hold” call on Singtel, with a target price of $3.32, indicating that stock trades at above its 5-year EV/EBITDA mean of 13.6x. 
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SINGAPORE (Dec 9): UOB Kay Hian is maintaining its “hold” call on Singtel, with a target price of $3.32, indicating that stock trades at above its 5-year EV/EBITDA mean of 13.6x.

On the whole, the brokerage appears to have a “cautiously optimistic” stance on Singtel, even as the group fights to defend its consumer and enterprise markets.

In a Monday report, lead analyst Chong Lee Len notes that the telco is guiding for stable top-line EBITDA for the upcoming year amid competition in the consumer segment and a weak enterprise business outlook.

“Singtel will focus on defending its market share in both Singapore and Australia, drive digital businesses and keep a tight lid on costs via digitisation of its traditional operating model,” observes Chong.

In particular, Chong hones in on the group’s Indian associate, Bharti Airtel, which now has new prepaid mobile plans with price hikes ranging from 15% to 52%. “This comes on the back of mounting losses by Airtel and Idea in the recent quarters,” says Chong. She notes that Airtel alone had reported core net loss of INR4.4 billion ($83 million) in 2Q20 on the back of provisions for unfavourable court verdict on adjusted gross revenue, as well as a competitive operating landscape.

But a respite could be on the horizon for Bharti, in the form of the recent tariff hike which Chong says could potentially lift the group’s FY20-21 net profits by 2% and 4% respectively. Yet, the near-term outlook remains fairly bleak.

“Near-term sentiment may be dampened by a recent capital raising exercise of US$3 billion ($4.1 billion) by Bharti,” says Chong, adding that a US$2 billion equity raising exercise will be carried out to approved shareholders, which could only tentatively include Singtel. The balance US$1 billion will be debt funded.

“This fund, we believe, will be channelled towards paying Airtels’ adjusted gross revenue payable to the Indian government by Jan 24 2020,” says Chong.

On a local front, Singtel is poised to thrive on the upcoming 5G spectrum allocation by the Infocomm Media Development Authority (IMDA). The authority has decided on a 2-player nationwide network and an additional 2-player localised network framework.

“We expect IMDA to allocate 5G spectrum by 30 Jun-20,” says Chong, who attests that Singtel could emerge a potential beneficiary.

“We believe the two-player nationwide network will include Singtel and a consortium of multiple mobile network operators (MNOs) such as Starhub, M1, TPG and fibre network provider Netlink Trust,” says Chong.

However, Chong is quick to caution that Singtel’s potential capital expenditure might amount to the region of $1 billion to $2 billion, which translates into a potential need to raise capital.

In addition, although the brokerage attests that Singtel could benefit from the rising global 5G trend, its stresses that the initial use case will have a reach limited to only smart cities, as well as smart yard-confined and autonomous vehicle applications.

“This implies that meaningful earnings growth from 5G application and ecosystem will only materialise from 2022,” says Chong.

“As such, in the near term, share price performance will be capped by higher capex intensity as telcos shift into the next 5G investment cycle,” adds Chong.

On the whole, the brokerage appears to have mixed views on Singtel on the back of a challenging landscape ahead.

However, Chong acknowledges that the group’s healthy dividend yield of 5.1% means that it is capable of distributing an ordinary dividend of 17.5 cents per share for FY20, barring any unforeseen circumstances.

As at 4.49pm, shares in Singtel are trading flat at $3.43. This translates to a price-to-earnings (P/E) ratio of 21.3 times and a dividend yield of 5.1 times according to UOB valuations.

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