DBS Group Research is reiterating its “buy” call on Singtel, but with a lowered target price of $3.04, from $3.09 previously. 

Analyst Sachin Mittal said the revised target price is largely due to continued weaknesses in Singtel’s Australian and Singapore businesses. Contributions from Australia to the group’s bottom line is likely to be affected by the sharp sequential decline of National Broadband Network (NBN) migration fee, coupled with roaming weakness, partly offset by lower handset losses. 

He added contributions from home turf is unlikely to see fair weather either as both roaming and pre-paid revenues will continue to be suppressed by travel restrictions. Enterprise revenues too are likely to suffer from projects getting postponed amidst Covid-19.

Singtel’s investment in its associates is worth $2.57 per share based on their market value, implying that its core business in Singapore and Australia is trading at a negative value of -9 cents per share.

However, this will be partially offset from lower losses by associate Bharti, and contributions from associates are likely to remain stable, given that a reduction in losses from Bharti will offset potentially weak results from Globe and Telkomsel. 

Currently, Bharti’s operational performance is maintaining the upward momentum with the telco’s average revenue per use (ARPU) in 1Q20 improving to INR157 ($2.88) from INR154 in 4Q20 due to a sharp tariff hike in Dec 2019. 

On the other hand, Globe’s results are expected to decline in 1Q21 from the spike in results experienced in 4Q20. Globe is expected to contribute $69 million (-18% q-o-q, +4.4% y-o-y) in 1Q21.

Meanwhile, Telkomsel’s contributions are likely to remain largely flattish due to continued competitive pressure from XL Axiata and Indosat which are vying for revenue market share gains in ex-Java territories.

On that note, contribution from associates are expected to be stable at $404 million over 1Q21, representing a 1% increase q-o-q and 48% increase y-o-y. This will primarily be driven by a $24 million sequential reduction in losses from Bharti with it contributing $17 million in losses; sequential $15 million reduction in Globe’s earnings with $69 million earnings contribution; and a flattish $243 million contribution from Telkomsel which constitutes some 60% of total associate contributions to Singtel. 

Over in Australia, Singtel also plans to divest its telco towers which are worth about $1.6-1.7billion, and the funds from the deal are expected to be utilised to improve Optus’s 4G regional coverage and to fund its 5G network rollout without further burdening the balance sheet. 

Although the analyst sees this divestment deal as potentially unlocking trapped value for Singtel, but  one of the potential risks of a sale and leaseback is the possibility of opening the towers to external tenants such as Vodafone Hutchison Australia or TPG.

Overall, Mittal is positive on the stock. “We expect Singtel to re-rate to 4.5% yield (15-year historic average) in a low-interest environment. In our view, FY21 projected dividend per share (DPS) of 12.25 cents at 75-80% payout ratio is sustainable in the long term,” he adds. 

As at 1.13pm, shares of Singtel were trading flat at $2.40 or 1.5 times FY21 book, with a dividend yield of 5%.