SINGAPORE (May 24): UOB Kay Hian believes Singapore Telecommunications (Singtel) subsidiary Optus could get a shot in the arm in Australia, after Telstra Corporation – the largest telecommunications company Down Under – was struck by a series of three nationwide outages in May.
“The three nationwide outages suffered by Telstra in May will dent its reputation for network quality and reliability built over the years,” says analyst Jonathan Koh in a report on Thursday. “Optus is likely to maintain its growth momentum and continue to gain market share at the expense of Telstra.”
“The widespread disappointment caused by the series of three nationwide outages suffered by Telstra in May is likely to result in consumers flocking to Optus in 1Q19,” he adds. Already, Telstra’s share price has tumbled to a 7-year low.
On the other hand, the analyst opines that Optus has adopted the right strategy in Australia.
“Optus has enhanced its network coverage and gained traction in regional Australia,” Koh says, adding that it has “stepped up capex over the past three years to enhance the breadth and depth of its coverage.”
At the same time, he says Optus “maintains sticky customer relationships and differentiates by bundling mobile, fixed broadband and entertainment offerings”.
The expected boost for Singtel’s largest contributor to earnings bodes well for the group. In 4Q18, Optus accounted for 28.5% of Singtel’s group profit before tax (PBT).
UOB is keeping its “buy” call on Singtel with an unchanged target price of $4.22, representing an upside of around 27% from its current trading price.
“Singtel is the largest and most liquid defensive stock listed on the Singapore Exchange (SGX) and deserves to trade at a premium,” says Koh.
Meanwhile, he points out that Singtel is also least likely among the incumbent telcos to be affected by the entry of a fourth mobile operator in Singapore, as some 70% of its bottom-line is derived from its overseas businesses.
In addition, Koh likes that Singtel has provided clarity and certainty on future dividends.
In its latest results announcement for the FY18 ended March, Singtel said it expects to maintain its ordinary dividends of 17.5 cents per share for the next two financial years. Thereafter, it will revert to the payout of between 60% and 75% of underlying net profit.
See: Singtel posts 19% drop in 4Q earnings to $781 mil; full-year earnings hit record $5.5 bil on NetLink Trust divestment
“We see the promise as a demonstration of management’s confidence that group earnings would not be unduly affected by increased competition in Singapore and Australia,” Koh says.
As at 11.44am, shares of Singtel are trading 1 cent lower at $3.33, implying an estimated price-to-earnings ratio of 15.4 times and a dividend yield of 5.2% for FY19.
