UOB Kay Hian analysts Chong Lee Len and Chloe Tan have maintained their “market weight” recommendation on the Singapore telco sector as its earnings for the FY2021 and, or 9MFY2022 came within their expectations.
The sector is currently trading at 12.6x EV/EBITDA, 1 standard deviation below its five-year mean EV/EBITDA.
During the period, the sector saw collective earnings growth of 11% y-o-y due to stronger post-paid revenue. The earnings improvement was also attributable to the strong associate contribution from Singapore Telecommunications (Singtel), as well as enterprise growth at Starhub and good cost discipline, write the analysts.
As such, Chong and Tan now expect the sector’s earnings for FY2022 to grow 15% y-o-y to a net profit of $2.25 billion amid high single-digit service revenue growth and Singtel’s associate recovery.
“Stepping into 2022, Singtel remains encouraged by the post-paid trajectory seen in Singapore and Optus while being cautiously optimistic about its associate investments in India, Indonesia and Thailand,” write the analysts in their March 9 report.
“Starhub guided for a robust 10% y-o-y service revenue growth but EBITDA will be adversely impacted by inflationary pressure (higher utility) and upfront investment for IT transformation. Starhub expects margin to recover from 2023 onwards (to at least 23% from 20%),” they add. “Similarly, Netlink expects operational inflationary pressure to materialise in 2022, including higher interest rates in the rising rate environment.”
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To the analysts, the sector’s earnings recovery is now more visible, given the “benign competitive landscape” and nationwide 5G rollout, which helps the incumbents maintain their market share.
“Pronounced earnings uplift from the enterprise business may take a longer time to bear fruit as telcos continue to explore new business applications for 5G,” add the analysts.
While Chong and Tan like Singtel and Netlink for their defensiveness, as well as Netlink’s 5% dividend yield, Singtel remains their sector top pick.
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The way they see it, Singtel is a proxy to Southeast Asia’s economic reopening. The monetisation of assets to narrow the valuation gap, including setting up a regional data centre and potentially, a regional digital banking outfit in Southeast Asia is also another plus point for the telco.
Chong and Tan have rated Singtel “buy” with a target price of $2.90.
“At our target price, the stock will trade at 14.5x FY2023 EV/EBITDA (slightly above its five-year mean EV/EBITDA). The stock currently trades at -1 standard deviation below its five-year mean EV/EBITDA of 13x,” write the analysts, who deem Singtel being on track to deliver growth for shareholders via its strategic reset.
“[Singtel’s] focus will include: capitalising the digital/IT growth trend via strategic partnerships, leveraging its infrastructure assets (data centres, towers and fibre) to unlock value, sweating its key assets, and investing in 5G for network superiority and future monetisation,” they add. “This is expected to help Singtel bridge the current market valuation gap as a conglomerate.”
Meanwhile, they have given Netlink a “hold” recommendation with a target price of $1.05.
On Netlink, the analysts say they “continue to see the stock as a good shelter amid market volatility given its strong earnings visibility, healthy balance sheet and cautious approach in terms of overseas/domestic acquisitions”.
Key catalysts to Netlink’s share price include growth in demand for non-building address points (NBAP) connections with the rollout of 5G/Smart Nation initiatives, investors seeking defensive yield from Netlink’s resilient, predictable, transparent and regulated cash flow, as well as earnings-accretive mergers and acquisitions (M&As).
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At the same time, the analysts have recommended investors look out for key events such as its regulatory review for 2023, expected to be announced by 4QFY2022.
Within the same report, the analysts have given StarHub a “hold” recommendation with a target price of $1.30.
As at 12.23pm, shares in Singtel, Netlink and StarHub are trading at $2.51, 96.5 cents and $1.24 respectively.
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