Singtel - Sanguine On Long Term Prospects
- Defensive business.
- Long-term growth drivers intact.
- Least impacted by 4th Telco entry.
Resilient earnings in times of economic uncertainty
- Donald Trump’s victory last month at the U.S. presidential election has added to uncertainties over the global economic outlook, especially given his strong support for policies skewed towards protectionism. That said, we also note that the market expects his aggressive expansionary fiscal policy to benefit U.S. economy, if pushed through.
- Drawing reference from the recent encouraging U.S. economic data points and the fed funds future rate, the implied probability of a rate hike in Dec 16 has now increased to 100%, from 80% a month ago before Trump’s victory.
- We also saw Singapore Government bond yields, SOR and SGD interest rate swaps rising on the back of market expectations of higher interest rates environment ahead.
- Given the uncertainty, we believe investors should still allocate Singtel a strategic position in their portfolio, as we view it as a good quality defensive yield stock, with non-cyclical earnings and strong cash generation ability.
Positive long-term outlook
- Over the longer-term, we remain positive on Singtel’s prospects on three growth drivers:
- entrenched exposure to regional dominant telecom operators in India, Indonesia, Thailand and Philippines,
- growing presence in the cyber security space – we expect demand for cyber security services to grow as more important transactions get performed over the internet, and
- turnaround in its digital marketing arm on the back of growing demand for such services.
- Addressing concerns over 4th Telco entry in Singapore, we reiterate our view that the impact on Singtel as a group is not significant mainly due to the limited exposure to Singapore’s consumer mobile market.
Bargain hunt on pullbacks
- Despite Singtel trading at a forward yield spread of 256 bps against the Singapore Government 10-year bond yield, which is slightly below its 5- year mean, we deem that valuations are not demanding on strong longterm outlook.
- We also expect Singtel to be least affected by 4th Telco entry given its diversified earnings base. We believe investors should position for bargain hunting opportunities during pullbacks.
- Keeping forecasts largely unchanged, reiterate BUY, with the same S$4.27 FV.