DBS Group Research analyst Sachin Mittal seems excited for the regional telecommunications industry’s outlook this year. The way he sees it, last year could have been the inflection point and this year could finally be when the sector sees growth after five years of underperformance.
“After a long period of below-par returns, telecom sector is turning more exciting. Having underperformed for a long time, telecom sector outperformed in Indonesia and Thailand but still underperformed in Singapore in 2021,” says Mittal, who believes that this could be attributed to the mobile sector consolidation in Indonesia and Thailand.
In Singapore, fourth mobile network operator TPG secured a small tranche of 5G spectrum in November 2021, dashing hopes of sector consolidation in the near term. There have been some recent consolidations and partnerships between the large telco players in Singapore lately too, with StarHub acquiring a 50.1% stake in MyRepublic’s broadband business in Singapore.
On the outlook for this year, the analyst believes that Indonesian telcos will continue to outperform, while Singapore telcos may begin to outperform.
In Indonesia, unlimited data plans were discontinued from mid to late 2021 onwards and could translate into 7% mobile sector growth in 2022, compared to only 4% in 2021. This would supplement fixed broadband revenue growth of over 20% in 2022 whose penetration rate is only about 18% compared to 52% in Thailand and even lower than 34% in Philippines.
“We expect Singapore mobile revenue to enter positive territory in 2022 led by a rising 5G adoption (about 7% of postpaid subscribers in 2021) and a gradual roaming recovery. Capital re-cycling should be another driver, leading to higher earnings payout ratio than the last year,” says Mittal.
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To recap, Singapore Telecommunications (Singtel) has been actively recycling its assets, with its latest divestment being its sale of its Australian tower network to AustralianSuper for $1.4 billion and its sale of its payment card compliance business SecureTrust for $107.8 million. The recent sell-off is part of Singtel’s plans to reposition the company for growth and to unlock further value.
Overall, Mittal likes Singtel and PT Telkom as his top picks within the sector that could potentially bring about 30% returns including dividends.
For Singtel, a recovery in the core business in Singapore and Australia is the key to the stock price, according to Mittal. A sharp recovery at Optus might strengthen the core business while Bharti would be the key growth driver.
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For PT Telkom, a pickup in mobile revenue growth should drive the stock price although fixed-broadband business should continue as its key growth driver.
In terms of valuations, both Singtel & PT Telkom are trading below their five-year average P/E.
