Macquarie Equities Resesarch (MER) recently released a research paper on SingTel on 12 July, reiterating its ‘Outperform’ rating on the telecom company. SingTel remains as MER’s top pick in the Singapore telecom sector and MER increased its 12-month price target to $4.33 from a previous forecast of $4.22.

The reasons for MER’s outlook are stated in the research report, some excerpts are shown below.  

MER believes that SingTel’s strategies to move up the service layers rather than rely on the increasingly commoditised infrastructure layers will continue to differentiate the company from its peers. Meanwhile, consolidation in the Indian and Indonesian telecoms markets provides key rerating catalysts for SingTel (7.3x FY14 adj EV/EBITDA; 4% yield) and its associates’ valuations.

Impact
Innovating to stay ahead. MER’s visit to SingTel’s Business Solutions Centre showed further progress in a number of projects which MER had seen in previous visits, with some now entering the monetisation stage. It was also very evident how lessons garnered from its core government-related projects had spurred new products for the commercial space. While the financial benefits of these projects (ex-implementation revenues via National Computer Systems) are likely to be small in the near term, MER came away convinced that they will play an ever increasing importance to SingTel’s medium-term earnings across the group.

Indonesian consolidation for greater returns. With the consolidation process in Indonesia set to take off with a widely expected tie-up between XL Axiata and Axis, MER expects a more supportive competitive environment to boost medium-term earnings and a valuation rerating of the Indonesian telcos. MER’s valuations of Telkomsel has increased by 25% as a result of these medium-term earnings upgrades.

Optus – Lower growth, higher margins. MER expects Optus to deliver lower revenue growth as MER scales back expectation on the market growth dynamics. However, MER is of the view that furthercost reductions on consolidation of retail distribution channels, lower network payments, reduced overheads, and possibly lower marketing expenseshould support improved margins.

Source: Macquarie Research - 18 Jul 2013