SingTel - DBS Research 2019-07-08: Take Some Profit As Rally Could Be Losing Steam

SINGTEL (SGX:Z74) | SGinvestors.io SINGTEL (SGX:Z74)

SingTel - Take Some Profit As Rally Could Be Losing Steam

  • SINGTEL (SGX:Z74)’s holding co discount has narrowed to 17% from a high of 35% after recent rally; take some profit as yield may not drop much below ~5%.
  • Few catalysts could add another ~20 Scts to our Target Price but we don’t have much clarity on these catalysts currently.
  • Downgrade to HOLD with a revised Target Price of S$3.60.

Take some profit as rally could be losing steam

  • Take some profit after the recent rally. SINGTEL (SGX:Z74)’s holding company (hold-co) discount has narrowed to 17% from a high of 35% with the recent rally in Singtel’s share price. Further upside may be limited as
    1. hold-co discount is now close to the 5-year average of 14%,
    2. dividend yield below 5% may not appeal to yield hunters.
  • We believe any further upside would be driven by three key catalysts:
    1. earlier than expected earnings recovery at Bharti Airtel,
    2. signs of stabilisation of SingTel’s core operations in Singapore,
    3. improvements in the valuation of SingTel’s digital businesses.
  • Due to the lack of clarity around these catalysts, we downgrade the counter to HOLD.

What could fuel Singtel’s rally further?

Singtel’s rally might be losing steam.

  • Three key catalysts to fuel the rally going forward. Singtel’s share price has rallied 23% since January 2019 from a low of S$2.86, driven by the market’s search for yield and defensive stocks in the wake of global economic and trade woes, and steady improvements in the share prices of SingTel’s associates.
  • While we believe the rally might be losing steam for now, as SingTel’s holding company discount has now contracted to just 17% from a high of 35%, we believe further improvements in the share price would be driven by three key catalysts.

a) Stabilisation of Singtel’s core business in Singapore.

  • SingTel’s core Singapore dipped 819, driven by weakness Singapore sector and declines Singapore segment. Singapore service fell 19 with dynamics and migration plans leading to in the EBITDA Singapore segment.
  • EBITDA of the Singapore also dropped 7% y-o-y with growth in orders from the Smart programme and contribution the low ICT businesses revenues. SingTel’s management for stable core in FY20F the impact of a weaker and National Network (NBN) migration Optus set weakness in Singapore operations.
  • Signs of stabilisation or an improvement in core operations of Singapore would hence be a key catalyst for Singtel’s share price in our view. Stabilisation or an improvement in Singapore operations would allow SingTel to record growth in core EBITDA, driving up the valuation of SingTel’s core-operations. Any form of stabilisation would be led by the enterprise segment with a potential increase in orderflow from Smart Nation programme and order wins in the ICT and managed services space.
  • The Consumer sector led by mobile is likely to remain weak, with ongoing migration to SIM-Only offerings, tightening competition among the incumbents as SingTel counters the recent revamped packages of M1 and a potential commercial launch by TPG in 2H19.
  • A potential stabilisation of SingTel’s core business in FY20F could increase the valuation of SingTel’s Singapore operations to 7.5x FY20F EV/EBITDA vs. 7.0x under our base case, and lift our Target Price by S$0.05.

b). Improved valuation of Singtel’s digital businesses.

  • We have valued SingTel’s digital businesses, comprising Cyber-Security and Digital Life segments at.
  • The Cyber-security segment is valued at x, pegged to a 20% discount to peer average to account for the lack of profitability of SingTel’s cyber-security operations.
  • Digital Life segment, which largely comprises of the Ad-Tech firm Amobee group, has been valued at 5x, at a 30% discount to the average valuations of recent acquisitions in the Ad-Tech space. SingTel plans to monetise Amobee over the next three years either through an Initial Public Offering or a private sale.
  • Amobee is set to deliver double digit growth in revenue over the next three years and show improvements in EBITDA as the business scales up. Amobee reported an EBITDA of S$1m in FY19 vs. S$31m in FY18, as the consolidation of Videology acquired in August 2018 weighed on Amobee’s profitability.
  • Assuming Amobee reports 20% growth in revenue in FY20F, with significant improvements in EBITDA supporting a valuation of EV/Revenue of 1.5x, in line with the average valuation of recent ad-tech acquisitions, we project Amobee could add S$0.04 to our current Target Price for SingTel.

c. Surprise improvement of Bharti Airtel’s performance led by milder competition and cost cutting initiatives.

  • Under our base case, we project competitive conditions in the Indian mobile market to remain intense over the next 6-9 months as Jio works towards gaining ~30% market share by snatching subscribers from weakness of Vodafone-Idea. While Bharti Airtel has shown signs of improvement with sequential recovery in both mobile revenue from India and group EBITDA, rising depreciation and amortisation and financing costs from on-going network expansion are likely to weigh on the telco’s profitability in FY20F and we expect Bharti to remain in loss making territory in FY20F.
  • Any upward revision of tariffs in India by Jio during 2019 would be a key catalyst for Singtel’s share price. An upward revision of tariffs by Jio would herald milder competitive conditions in India after almost three years of aggressive price wars between operators, paving way for Bharti to lift its depressed ARPU and mobile revenue.
  • Further improvements in Bharti’s EBITDA through savings accrued via its “War on Waste” cost cutting initiative or improvements in Bharti’s bottomline driven by a steep reduction in finance expenses with Bharti utilising capital raised through its fund raising exercises to relieve its mounting debt, would allow SingTel to record lower losses from Bharti, driving up SingTel’s associate earnings, which has historically been a key catalyst to Singtel’s share price.
  • Assuming an improvement in market conditions in India along with improved internal performance of Bharti would lead to a 15% improvement in Bharti’s share price, we believe a surprise from Bharti could add S$0.10 to our current Target Price.


Downgrade to HOLD with a revised Target Price of S$3.60.

  • We downgrade SingTel to HOLD and raise our sum-of-the-parts (SOTP) valuation to S$3.60 from S$3.55 earlier to reflect improvements in the valuations of regional associates.

Key Risks to Our View:

Bull case valuation of S$4.00; bear case valuation of S$3.00.

  • Bull case valuation assumes stronger core business, Bharti Airtel’s share price is 15% higher, and lower hold-co discount of 10% vs 14% under our base case.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2019-07-08
SGX Stock Analyst Report HOLD DOWNGRADE BUY 3.60 UP 3.550