SingTel - Opportunity in undervalued digital business
- Singtel buying opportunity due to undervalued digital business; expected to turn around in FY19F.
- Digital business a key growth driver in the 5G era.
- Recommend BUY on TP of S$4.46.
Digital business to underscore the stock price.
- Singtel’s share price suggests over 50 Scts (per share) of value destruction from digital businesses (mainly digital advertising and cyber security) versus our conservative estimate of a 10-Sct value creation.
- Potential IPO of Netlink Trust in 2017 could bring the focus on the value of digital businesses in Singtel.
Digital businesses to turn EBITDA positive in FY19F, to be the key driver in the 5G era.
- We project the annual EBITDA of the cyber security segment to rise from S$10m in FY16 to S$54m in FY19F. This, coupled with lower EBITDA losses in digital advertising, should add an estimated S$150-200m to group EBITDA in FY19F versus FY17F.
- In our view, network advantage is likely to fade away in the long term as most telcos are likely to move towards a shared 5G network model to save capex. Telcos with robust digital offerings on top of commoditised network access will be well positioned to capture growth in the enterprise space.
Near-term drivers in place.
- Potential double-digit earnings growth at Telkomsel should more than offset any earnings decline at Optus in FY18F while we expect Singapore earnings to be resilient. Besides, higher stakes in Bharti and AIS will be additional drivers over the next 12 months.
- We use a sum-of-the-parts (SOTP) valuation for Singtel to derive a target price of S$4.46.
- The stock offers ~18% upside in addition to a FY17F (March Year End) yield of ~5%.
Key Risks to Our View
- Digital advertising business may continue to have stable or higher EBITDA losses. Our projection of digital advertising EBITDA losses to reduce from S$150-180m in FY17F to S$20- 30m in FY19F may be too optimistic due to intense competition.
- Currency risk a concern. Singapore only contributes about 30% of overall earnings for Singtel. As a result, strengthening of the Singapore dollar could have a dilutive effect on the bulk of Singtel’s earnings.