Brokers' Digest: Singtel, SIA, Genting Singapore, Suntec REIT

Analysts are positive on Singapore Telecommunication (Singtel) as the group’s potential divestments of Amobee and Trustwave could mean an upward earnings revision after a long time.

To that end, DBS Group Research Sachin Mittal is keeping his “buy” call on Singtel with an increased target price of $3.24 from $3.20 previously.

Mittal currently values Singtel’s core business at 81 cents per share (from 77 cents previously), thanks to higher core profit due to the potential sale of Amobee and Trustwave. He also maintains his valuation of the group’s regional associates at $2.43 per share, using a 15% HoldCo discount to reflect a gradual business recovery.

On June 20, Singtel was reported to have been in talks with UK-listed advertising technology company, Tremor International, to sell the largely loss-making Amobee for GBP165 million ($280.4 million). Singtel is also exploring the potential sale of another subsidiary, Trustwave.

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“Overall, [the sale] could result in avoiding an estimated $200 million to $210 million annual operating loss ([around] 9% of FY2023 ending March 2023 underlying profit) from Amobee and Trustwave, although the savings would be slightly lower in FY2023 due to the timing of Trustwave classification,” the analyst writes.

On this, Mittal has raised his earnings estimates for FY2023 and FY2024 by 5% and 4% respectively based on the potential sale of the subsidiaries. But Mittal’s estimates are still below consensus estimates, as he accounts for slower recovery in Singapore and Australia.

“As Amobee is in an advanced stage of sale, Amobee might be classified as a subsidiary that is ‘held for sale’ from 1QFY2023 onwards; therefore, its revenue and earnings will not be captured from FY2023 onwards in Singtel’s reported profit,” he says.

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“We also expect Trustwave to be divested in FY2023 as Singtel has mentioned about its potential sale a few times and it could be classified as ‘held for sale’ in 2QFY2023 or 3QFY2023 in our view,” he adds.

Mittal is also positive on Singtel’s prospects after its Australian subsidiary, Optus, had raised the price of Optus-choice plans by A$4.00 ($3.81) for existing subscribers in early July. This increment translates to around 10% to 15% on an average revenue per unit (ARPU) of A$31.

“The last tariff increase by Optus in May 2021 was not applicable to existing subscribers who had joined before May 2021,” notes Mittal. “This July upward revision will be applicable to subscribers who joined before May 2021 which will further boost ARPU growth.”

On the other hand, Mittal is upbeat on the growth of Singtel’s core business amid the resumption of cross-border travelling. He believes that Singtel should be less reliant on the Singapore economy compared to local banks in Singapore who offer similar growth.

“Furthermore, increasing contributions from associates will further support the telco’s earnings growth, making the company an exciting stock that offers a better mixture of growth and yield,” he adds.

At its current prices, Singtel offers a yield of over 4.0% based on a 75% payout ratio. Among regional telcos, Singtel offers “far superior growth” than other telcos that pay dividends, the analyst continues.

Similarly, UOB Kay Hian analyst Chong Lee Len has kept her “buy” call on Singtel with an unchanged target price of $2.90.

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“At our target price, the stock will trade at 13x FY2023 EV/Ebitda (its five-year mean EV/ Ebitda),” she writes.

In her report dated July 18, the analyst highlights Singtel’s strategic reset, where management aims to monetise its 5G investments in Singapore and Australia, as well as unlock the value of its inherent assets and recycle the capital into growth levers.

The way Chong sees it, this will drive a post-Covid-19 three-year earnings compound annual growth rate (CAGR) of 15%.

“This will pave the way for Singtel to narrow its holding company discount as the company actively reallocates capital to drive core business growth and general sustainable cash flow to enhance shareholder’s value. We project a three-year earnings CAGR (FY2022–FY2025) of 15% vs –12% during the Covid-19 period (FY2019–2022),” she writes.

Like Mittal, Chong also sees the divestment of Amobee within the next 12 months as a plus for the telco’s FY2023 earnings. She expects an announcement regarding Trustwave in 2HFY2022. “To recap, both assets have been de-emphasised following the write-down in December 2021 (amounting to $1 billion of impairment),” she says.

For the FY2023, Chong is also anticipating Optus to report a positive mobile service revenue and ebitda margin expansion on the back of the potential price hike in Australia.

Further to her report, the analyst believes FY2023 should see a more detailed announcement on Singtel’s data centre partnership in Thailand and Indonesia.

“Singtel may identify suitable sites to develop data centres in Thailand. Gulf Energy will provide the energy while Singtel will step in with operational expertise. AIS will complete the offer with connectivity services,” she writes.

“Telkomsel and Singtel plan to form a joint venture (JV) company to develop data centres catering to the regional market. The JV can either acquire existing data centres or develop greenfield projects for data centre facilities. If the project is located in Indonesia, Telkomsel will own a higher stake, and if the project is in Singapore, Singtel will be the majority shareholder,” she adds.

Singtel currently has seven data centres in Singapore with a capacity of 70 megawatts (MW). Its goal is to add another 100MW of capacity to its data centre portfolio over the next three to five years, notes the analyst.

“This will create a data centre asset close to $7 billion to $8 billion within five years. Singtel recently announced that they are building a 30MW integrated cable landing station and data centre in Singapore, with funding being currently worked out with potential investors,” she writes. — Felicia Tan

Singapore Airlines
Price target:
UOB Kay Hian ‘hold’ $4.88

Resumption of travel to boost outlook

UOB Kay Hian analyst Roy Chen is maintaining his “hold” call for Singapore Airlines (SIA) with an unchanged target price of $4.88, amid passenger volume recovering and strong airfares returning.

“Our target price is pegged to [an] FY2023 P/B of 1.12x, which is 2.0 standard deviation (SD) above SIA’s historical average of 0.96x during the pre-pandemic years. SIA’s current price of $5.23 implies an FY2023 P/B of 1.20x,” he says.

In his report dated July 14, Chen says SIA, which is scheduled to announce its 1QFY2023 ended June 2022 business update, on July 28 after trading hours, is likely to have turned a profit in this past quarter.

“We deem the street’s current FY2023 full-year net profit forecast of $316 million, compared to our forecast of $1.35 billion (or $487 million if the impact of a substantial fuel hedge gain of an estimated $860 million is excluded), conservative and due for positive surprises,” says the analyst, who believes the street might have underestimated the power of SIA’s operating leverage.

“Looking beyond upbeat near-term earnings, SIA’s full recovery hinges on Northeast Asia, and its current valuation appears rich to us,” adds Chen. The analyst deems the airline’s current level of valuation as “unlikely to be sustainable by [its] fundamentals in the long run”

This is as SIA’s competitors may gradually recover or add more capacity, which would gradually drive passenger yields to more normalised levels.

For the upcoming 1QFY2023, Chen expects SIA’s reported net profit to come in between $180 million and $350 million, with its upcoming business update being the first quarterly reporting since Singapore’s major border measure relaxations in April. He also expects an overall positive tone from the company.

“As SIA is now in a turnaround situation whereby a slight variance in any of the underlying operating drivers, such as the speed or timing of workforce ramp-up and the level of pax yields, would result in significant fluctuations in profitability, we find it difficult to do a quarterly earnings estimate with good accuracy at this juncture,” writes Chen.

He adds that UOB Kay Hian’s guided range of $180 million to $350 million is its “best guesstimate”, by referring to SIA’s reported net loss of $210 million in 4QFY2022 and adjusting for the rise in an estimated 150% q-o-q increase of passenger numbers in 1QFY23, as well as the surge in airfares in the recent months.

SIA’s near-term recovery momentum is strong, with the company stating that its launched passenger capacity has been well booked into 2QFY2023 with strong pax yields. In a recent press release, the company guided to further re-activate its pax capacity to 81% of pre-pandemic levels by December, ahead of UOB Kay Hian’s projected 75%.

Meanwhile, Northeast Asia remains a drag, with China sticking to its “dynamic zero-Covid” policies and no timeline of opening up, and Japan and Taiwan opening borders with significant caution.

Chen writes: “Strong near-term momentum aside, we note that the full recovery of SIA hinges on the re-openings of Northeast Asian countries (which collectively formed 26% of Changi Airport’s passenger throughput in 2019), as they have been significantly lagging against the backdrop of global air travel open-up.”

As of May, air traffic to Singapore from mainland China and the rest of Northeast Asia were only at 3% and 17% of their respective pre-pandemic levels, significantly lagging behind the air traffic to Singapore from the rest of the world.

Despite the relatively slow growth in travel from Singapore to the region, policy changes to open borders in Northeast Asian countries could prove to be a share price catalyst for SIA. — Bryan Wu

Genting Singapore
Price target:
Citi Research ‘buy’ $1.01

Tourism is back

Citi Research analysts George Choi and Ryan Cheung have kept a “buy” rating on Genting Singapore with an unchanged target price of $1.01.

Genting Berhad most certainly is just beginning to enjoy the benefits from the lifting of travel restrictions. Genting Berhad is the holding company of Genting Group. As Genting Singapore is an important earnings contributor to the group, Choi and Cheung are not surprised by Genting Berhad’s decision to ignore an unsolicited offer for its stake in Genting Singapore.

“Although Genting Berhad does have approximately RM40 billion [$12.6 billion] of interest-bearing debt at end-2021, only around RM5 billion is due by end-2023, which means Genting Berhad does not have much debt repayment obligations in the near term,” explain the analysts.

Next, though Choi and Cheung observe that the group’s gearing is high, they argue that it should be coming down gradually from this peak level, thanks to the relaxation of Covid-19 restrictions in Singapore and Malaysia. “This in turn should fuel the ramp-up of Genting SkyWorlds at Resorts World Genting and the business recovery at Resorts World Sentosa,” say the analysts.

At the same time, Genting Singapore was the single largest ebitda contributor to Genting Berhad in 1QFY2022 — approximately 31% of Genting Berhad’s adjusted ebitda.

On top of that, Article 42 of the Casino Control Act states that prior written approval from the government would be required for a transfer of interest if, after the transaction, the remaining stake held by the main stakeholder of a casino operator falls below 20% of total voting shares, or the acquirer holds equal to or more than 20% of total voting shares.

“We value the Singapore casino at 10x FY2023 EV/Ebitda, roughly on par with Macau Peninsula, given the similar growth profile,” say Choi and Cheung. “We value the new phase at a higher 12x target multiple (discounted back to 8x) as we expect the new phase to accelerate visitation, gross gaming revenue (GGR) and ebitda growth when it opens.”

The analysts also value the theme park at the same approximate 10x EV/ Ebitda multiple. — Chloe Lim

Suntec REIT
Price target:
RHB Group Research ‘buy’ $1.95

Concerns over increasing financing costs

RHB Group Research analyst Vijay Natarajan has kept a “buy” rating on Suntec REIT with a lowered target price of $1.95 from $2.

In his July 18 report, the analyst notes that Suntec REIT’s price has dropped by 15% from the peak in April, mostly on concerns over the increase in financing costs from the sharp spike in interest rates.

“We still think upside from organic income growth on its office and retail portfolio should more than offset the negative impact of its low debt hedge profile,” says Natarajan.

The REIT is currently trading at 0.7x P/BV — a stark contrast from the high premium paid in Singapore office transactions in the market, observes Natarajan.

Suntec REIT’s Singapore office assets, encompassing almost half of its income, has had positive rental reversions for the last 15 quarters. Rent reversion was at 5.3% in 1Q, and should grow by low-to-mid single digits this year, amid continued strength in Singapore office sector rental rates.

The REIT’s overseas office assets, approximately 35% of income, are typically on long leases, with annual rate escalation clauses (of 2%–3% per annum in Australia) and rent review (typically pegged to inflation index) in the UK.

The positive rent growth mitigates the impact of rising interest rates, says Natarajan, as it has among the lowest hedges of the REITs, where approximately 51% of debt is hedged, and every +50 basis points (bps) will have an approximate –4.7% impact on distribution per unit (DPU).

Meanwhile, Suntec City Office strata unit sales indicate a huge valuation gap, says the analyst. In June, an entire office floor on the 30th storey in Suntec City Tower 2 was sold at a record $38.8 million, or $3,300 psf.

Based on media reports on the Suntec Office Sale, another floor has been put on the market at $36 million or $3,600 psf. The indicative psf sale price is around 50% higher than Suntec City’s office area’s end-2021 valuation of $2,415 psf.

“This indicates Suntec City’s BV/share of $2.13 is very conservative, and the current traded price of 30% below its BV seems to be a bargain,” says Natarajan.

Suntec City mall has registered flattish rent reversion in 1Q, after seven straight quarters of negative rent reversions, with the occupancy rate up 1.3 percentage points q-o-q to 96% and a positive outlook for the rest of the year.

Its convention segment — which has been in the red for the past two years — is also expected to turn profitable in 2HFY2022 ending December, according to the analyst.

At the same time, divestment still on the cards for Suntec REIT. Management is still evaluating other divestment opportunities in its portfolio, possibly 177 Pacific Highway, and re-evaluating its redevelopment plans for Southgate Complex (50% stake), to take into consideration changing work-from-home trends and micromarket demand.

“A potential divestment at a premium to [Suntec REIT’s] book value (BV) could further enhance BV and address its gearing (43.3% currently) and hedging concerns,” says Natarajan.

Further to his report, the analyst has trimmed his DPU estimates for FY2022–FY2024 by 1%–3% after tweaking interest cost assumptions. — Chloe Lim