RHB Research sees “some positive vibes” in the Singapore telecommunications (SG telcos) sector for this year. “We see the stronger GDP growth and peaking interest rates as supportive of Singapore’s SG telcos in 2024. Sector FY2024 EV/EBITDA of 9.4x is fair (-1SD from historical mean), given the mature stage of the market, and at a premium to the ASEAN-4 average of 6x. This is justified, in part, by superior yields,” says the Singapore research team.
The SG telcos notched under 1% return in 2023 (FSSTI: -0.3%, YTD: -2%) on stock-specific issues and earnings headwinds (investments in new capabilities and inflationary pressures).
“We see sector core EBITDA growing by about 12% y-oy in 2024 from a 7% y-o-y growth in 2023, largely from better operational numbers and cost restraint. SG telcos continue to offer the highest dividend yields among the ASEAN-4 telcos, at 5.5% on average for FY2024. This compares with the 4% in Malaysia, 2.7% in Indonesia, and 3.5% in Thailand,” says RHB.
On that note, RHB sees a further normalisation of industry roaming revenues this year, compared to the pre-pandemic levels (currently at 60-70%) from the pick-up in visitor arrivals.
This comes on the back of the reciprocal visa-free scheme extended to inbound China travellers, which is set to be implemented soon, and additional flights between the two countries. “Overall, industry blended mobile average revenue per user (ARPU) (9M2023: +3.3 y-o-y) should be supported by stronger 5G monetisation and rational competition,” says RHB.
Industry picks
Singapore Telecommunications (Singtel) has remained to be RHB’s top sector pick, as the it is a regional sector bellwether and a core telco portfolio constituent.
“We see continued return on invested capital (ROIC) improvement (low double-digit target by FY2026) from cost-saving initiatives ($0.6 million targeted into FY2026) and synergies from the combined Singapore mobile and enterprise operations; potentially higher dividends (including specials) from capital recycling ($6 billion targeted) as share price catalysts,” says the RHB research team.
While mid-term headwinds (higher churn) are expected for Optus after last November’s major network incident, RHB believes that the market price reparation remains a strong underlying catalyst. Post 1HFY2024 results, management has raised DPS guidance to 70-90% of core PATAMI (from 60-80%). RHB has projected 12.9% FY2024-FY2026 core earnings CAGR.
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RHB has a "buy" call and $3.20 target price on Singtel.
Meanwhile, uncertainties surround StarHub CC3 despite lower spending on its business transformation. The company is mid-way through its multi-year (2022-2025) transformation programme DARE+, which is set to strengthen its core focus and offerings (Infinity Play) in the longer term.
While management guided for lower DARE+ spending at its recent 2023 Investor Day, of $270 million, compared to $310 million previously, RHB reckons that the benefits and positive synergies will likely take time to accrue – with execution and weaker-than-expected transformation outcomes still being key downside risks.
RHB has a "neutral" call and $1.15 target price on StarHub.
Overall, the some key downside risks in the sector include Intensifying competition, weaker-than-expected earnings, and the negative effect of external macroeconomic developments. A sector consolidation portends upside risk.
As at 9.50am, shares in Singtel are trading at $2.41, while shares in StarHub are trading at $1.05.
