SINGAPORE (Nov 22): DBS Group Research is upgrading Singapore Telecommunications (Singtel) to “buy” and raising its target price by 15.4% to $3.60, on the back of earlier-than-expected tariff hikes in India.
In a report on Nov 22, DBS analyst Sachin Mittal notes that the group’s India associate, Bharti Airtel, which dragged Singtel to its first-ever quarterly earnings loss in 2QFY2020 ended September, has announced plans to raise tariffs from December 2019 onwards.
The tariff hike is intended to help Bharti sustain its business, after the company was slapped with a huge regulatory levy of US$3 billion ($5.5 billion). Provision for these license fee and spectrum usage charges had led to Singtel sinking into the red in 2QFY2020.
See: Bharti Airtel provision sends Singtel $668 mil into the red
“On the back of proposed tariff hikes in India from December 2019 onwards, we are confident of a sharp rise in regional associates’ profit contribution in FY2021F, which has been the most critical factor in Singtel’s share price performance historically,” Mittal says.
Mittal notes that the Indian telcos have not dropped any hints so far on the magnitude of the tariff hikes, but believes that a 10-20% tariff hike is “quite possible”.
“A 10% mobile tariff hike at Bharti may contribute an additional 3% earnings to Singtel,” Mittal says.
The way he sees it, Singtel’s associate profits should see a rebound towards the end of FY2020F and accelerate in FY2021F.
“Despite weakness in Singapore and Australia, we raise Singtel’s FY2021F underlying profit by 2% due to a healthier Bharti,” Mittal adds. “Singtel offers annual earnings growth of 8% over FY2020F-2022F, coupled with over 5% yield.”
As at 3.41pm on Friday, shares in Singtel are trading 6 cents higher, or up 1.8%, at $3.32. According to DBS valuations, this implies an estimated price-to-earnings (P/E) ratio of 43.4 times and a price-to-book value (P/BV) of 1.9 times for FY2020F.
