Samantha Chiew Published on Tue, Jul 13, 2021

RHB Group Research is keeping its “buy” call on Singapore Telecommunications (Singtel), albeit with a lower target price of $3.00 from $3.30 previously, while keeping the stock as its preferred Singapore telco pick. 

In a July 13 report, the RHB research team says, “We believe share price re-rating catalysts could come from mobile revenue hitting an inflection point in 1QFY2022 (Mar); good enterprise ICT momentum from strong public sector pipeline; and value unlocking from asset sales.”

To that end, the team expects y-o-y decline in mobile revenue to bottom out in 1QFY2022 due to the low base effect arising from the imposition of the Circuit Breaker in 2Q2020, and stronger economic activities under Singapore’s Phase 3 re-opening.

Singapore mobile revenue slumped 23% y-o-y in FY2021 and was down 18% y-o-y in 4QFY2021, with travel restrictions pummeling roaming and prepaid revenues. A stronger recovery would nonetheless still come from the progressive relaxation of international travel into 2022, which should drive a rebound in roaming and prepaid sales.

The research team has adjusted FY2022-2023 core earnings estimates by -2% to 11% to factor in a more restrained recovery in mobile revenue and margins in the medium term, with the recovery thesis to gather pace in FY2023. 

Meanwhile, Optus’ consumer revenue and EBITDA have been hit by lower national broadband network (NBN) migration revenues and fixed retail margins over the past two years. Excluding NBN migration revenues, underlying revenue was steady while EBITDA narrowed 5% y-o-y in 2HFY2021.

“We expect the y-o-y recovery in mobile revenue to follow through in 1QFY22  from a higher penetration of the ARPU-accretive Optus Choice Plans alongside market price repair. We note Optus’ price increase in May was followed suit by TPG Telecom recently, which should instill greater market price discipline,” says the team. 

On the enterprise front, NCS has been repositioned as an Asian B2B digital services will be positioned as an Asian business-to-business (B2B) digital services champion with the regionalisation of its business targeting more private sector accounts, on top of its mainstay in the Singapore Government sector. The focus would be on driving new and digital capabilities/solutions (data analytics, artificial intelligence), cloud and cyber security.

“We see potential to further scale-up digital revenue streams given the structural shift in revenue and enterprise digitalisation efforts. Stronger ICT contributions will continue to buffer the weakness in legacy carriage revenue, supported by NCS’ $1.3 billion public sector pipeline secured,” says the team.

As at 11.30am, shares in Singtel are trading at $2.29 or 1.3 times FY2022 book with a dividend yield of 4.1%.