DBS ups Singtel’s TP to $3.39 led by Singapore segment and Bharti Airtel

A potential catalyst in DBS's view is the consolidation of the mobile sector in Singapore and special dividends from the group.

DBS Group Research analyst Sachin Mittal is keeping his “buy” call on Singapore Telecommunications Z74 (Singtel) with a higher target price of $3.39 from $3.18 previously.

“Our fair value for the company’s core business is 89 cents (previously 84 cents) per share due to higher Singapore operating profit coupled with a higher valuation of the data centre business. We value regional associates at $2.50 per share (from $2.34) using a 15% HoldCo discount, with most of the increase coming from higher market value of Bharti Airtel,” says Mittal in his Oct 4 report.

Singtel’s shares, which closed at $2.43 on Oct 3, is currently trading at a record holding company (HoldCo) discount of 47% versus its last five-year average of 31%.

The HoldCo discount has expanded from less than 15% in FY2018 to 47% currently, due to a 59% decline in its core operating profit (excluding associates) over the last five years,” the analyst notes.

However, he now expects the HoldCo discount to narrow to 15% to 20% due to a steady rise in Singtel’s core operating profit.

“Key drivers are tariff-hikes in Australia and cost-savings from merging consumer and enterprise businesses. A divestment target of $6 billion (over 36 cents per share) over the next two to three years would support special dividends, save interest costs as well as help to reduce HoldCo discount,” says Mittal.

The analyst remains positive about Singtel as he sees the business benefitting from its geographical diversification. The telco is the top integrated player in Singapore and owns Optus, which is the second top mobile player in Australia. Furthermore, Singtel owns significant stakes in its telecom associates in India, Indonesia, Philippines and Thailand. These stakes have contributed over 68% of the group operating profit in the FY2023 ended March 31.

A potential catalyst in Mittal’s view is the consolidation of the mobile sector in Singapore and special dividends from the group.

“We project annual dividend per share of 14.9 cents over the next three years, supported by 3 to 4 cents of special dividends, leading to a total yield of 6.2%,” he writes.

In addition to his higher target price, the analyst has raised his FY2024 and FY2025 earnings estimates by 3% and 4% to reflect the sale of Trustwave.

Singtel, on Oct 2, announced that it had agreed to sell Trustwave to MC2 Titanium for US$205 million ($280 million).

Meanwhile, a key risk to Mittal’s upbeat view is a further decline in the Australian dollar (AUD) or irrational competition in the country.

“There can be adverse impact from Optus due to any irrational competition coupled with further decline in the AUD. Our base-case assumes a gradual recovery in Optus’ operating profit which could be at risk,” says Mittal.

As at 10.53am, shares in Singtel are trading 4 cents higher or 1.7% up at $2.39.

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