• Keep BUY, with new SOP-derived TP of SGD3.50 from SGD3.25, 14% upside and c.6% FY25F (Mar) yield. A spate of positive developments has catalysed the strong re-rating of Singtel shares in recent weeks. We see earnings tailwinds lifting return on invested capital (ROIC) to the double-digit territory in FY25F. Capital management, dividend upside, ROIC accretion and price repair in key markets are key investment merits. Singtel remains our preferred Singapore telco pick. Our TP incorporates a 4% ESG premium.

• Earnings momentum to pick-up; ROIC upside. Singtel’s share price has re- rated by nearly 20% over the past month, supported by: i) The growing conviction of its earnings construct, ii) positive news flow related to data centre investments in Malaysia and globally (via STT Global Data Centres), iii) market price repair with the hardening of mobile tariffs across Australia and India, and iv) news of additional sell down on the shares of associate, Airtel. We see stronger cost rescaling and synergies from the consolidation of the Singapore enterprise business and Optus (part of the SGD0.6m in targeted cost savings into FY26F) from 2QFY25 fuelling earnings momentum. This should help lift ROIC to c. 10% in FY25F and c.11.3% in FY26F (FY24: 9.3%).

• 9% stake in larger NewCo under Thai amalgamation exercise; potentially higher stake in AIS (ADVANC TB, BUY, TP: THB256). In the amalgamation exercise announced on 16 Jul, Singtel’s 25% stake in Intouch Holdings (INTUC TB, NR) will be substituted with a c.9% holding in NewCo via a share swap (Figure 1). A requisite voluntary takeover offer (VTO) for 23.3%-owned AIS (ADVANC TB, BUY, TP: THB256) could see Singtel’s direct stake increase by another 10% with a total outlay of SGD2.4bn. Overall, the exercise would eliminate the convoluted indirect cross shareholding structure in AIS (via Intouch which holds a 40.4% in AIS). As NewCo is a significantly larger and a more liquid entity, we believe a potential monetisation in due course would fetch better premiums vs the current holding in Intouch, which suffers from a holding company (holdco) discount. The VTO is likely to be implemented in 4QCY24 with full transaction completion in 2QCY25 ie Singtel’s FY26F.

• Still BUY; variable realisation dividend (VRD) is supported by SGD6bn mid- term capital recycling target. We see the VRD announced in May (3-6 SG cents/share) supported by the SGD6bn mid-term capital recycling target. This could stem from a further sell down/dilution of associate stakes in Airtel (29% currently) and/or other non-strategic holdings (ie Singapore Post (SPOST SP, NR), NETLINK NBN TRUST (NETLINK SP, NR)). The first tranche of the 3.8 SG cents/share VRD declared post FY24 results of 1.9 SG cents/share will be paid in August. We lift our TP to SGD3.50 after raising our FY25F-27F earnings by 2-7% and factoring in the latest market valuations of Airtel and Intouch. Key risks are competition, SGD strength and weaker-than- expected earnings.

Source: RHB Research - 19 Jul 2024