Telecom giant SingTel is generally considered a safe play during difficult times and may have substantiated that belief with its 1.6% increase yesterday to $3.74 on a day where the overall STI bourse fell 0.9%.

Two weeks ago on 27 May, Macquarie Equities Research (MER) had published a research piece reiterating their Outperform call on SingTel, stating that it was their top pick in the Singapore telecom sector.

MER’s report had come on the back of its first quarter results announcement, and noted the below points to substantiate their rating and target price on SingTel.

Singapore – Core development continues. In addition to continued strength in its mobile data revenues, SingTel’s other IT- and data-related businesses, e.g. NCS and MNS, continue to deliver positive growth trends which MER estimates will support a 4% FY13-16 revenue CAGR which in turn will fuel a 6% EBITDA CAGR for the Singapore business. Should the MDA’s decision to require SingTel to cross-carry BPL content hold, then profitability in the FY14-16 period could receive a boost from a full-cost-recovery-based pricing model for
sports content, rather than the current loss-leader model.

Australia – Cutting costs to fend off revenue pressures: The Australian mobile market is in decline due to the impacts of lower MTAS, device repayment plans, reduced breakage, falling roaming rates, and general competitive pressures. In response, Optus has focussed on cutting costs and reducing handset subsidy to focus on customer profitability, boosting EBITDA in the short term. In coming quarters, the positive EBITDA momentum should
hold. But if subscriber trends stay soft, increased pressure to reinvest in Optus’s customer base could pressure earnings 12-18 months from now. Separately, Optus is considering the sale of its Satellites division, which could net A$2bn+.

Emerging market assets provide multiple kicker. MER believes a key ingredient for the further rerating of SingTel’s shares will be a rerating of two key associates, Telkomsel and Bharti. MER’s  blue-sky valuation of $5.93 assumes that more rational competitive dynamics in Indonesia lead to greater earnings and cashflow visibility which in turn drive a multiple rerating of Telkomsel to 8x EV/EBITDA. Similarly for Bharti, improved pricing power in India and greater visibility out of Africa should provide the rerating catalysts to take Bharti off its undemanding 6.4x FY14 EV/EBITDA multiple towards 10x.

12-month price target. MER has a 12-month target price of $4.22 on SingTel and believes that the stock price catalyst comes in the form of improved pricing in India and a re-rating of other regional assets.

Source: Macquarie Research - 12 Jun 2013