SingTel was a laggard yesterday after slipping 0.8%. However, the telecommunications company has been on a uptrend, making higher highs and higher lows. Macquarie Equities Research (MER) released a research report on 30 May reiterating its ‘Outperform’ rating, with a 12-month price target of $4.15 on the shares. MER’s target price is 7.5% higher as compared to SingTel’s closing price of $3.86 yesterday.

Event
MER reiterates its Outperform recommendation on SingTel following a non-deal roadshow with senior management where they met 22 investor groups over four days in Europe. As described by management, this was the first time that the focus of meetings was on the Singapore business, where clearly SingTel is outperforming its peers. While Optus remains a near term drag on the core, improving dynamics in India and Indonesia provide for rerating catalysts. At 7.3x FY15E adj enterprise value/earnings before interest, tax, depreciation and amortization (EV/EBITDA) and offering a 4.6% dividend yield, SingTel remains MER’s top pick within the Singapore telecoms sector.
 
Impact
Singapore – data push on mobile and the home. On the mobile front, where investors were generally impressed by SingTel’s performance over the last six months, management saw improving network quality especially on its LTE network (97% coverage) driving usage and revenues. SingTel will have an LTE-A network capable of 300Mbps by year end, and this should spur further changes in consumer behaviour. In the fixed segment, they saw the situation as a land grab for ADSL and cable broadband subscribers switching to fibre. SingTel’s reduced content gap to StarHub has also meant 75% of new signups also take up TV services – spurring household average revenue per user (ARPUs).
 
Australia –rebasing. Management saw the last two years as a period of rebasing for Optus, and look forward to the switching on of the 700MHz spectrum for LTE to allow Optus to increase activities to win customers. The new spectrum allows Optus to offer a premium network experience while the removal of untenable price plans for data in 2H13 should also spur usage.
 
Pricing for data – taking away the shock. Management felt that lower pricing for data overage and roaming was positive for operators. High data charges they felt discouraged usage on new LTE networks, which have lower unit costs while high roaming charges encourage the use of over the top (OTT) services and the purchase of foreign prepaid SIMs – both earnings dilutive in the long run. Their own fixed rate data roaming plans have begun to reap positive results.
 
M&A – options exist. Management maintained their view that SingTel was open to upping its stakes in its associates but nothing was imminent. They did look forward to the future monetisation of its Digital Life assets to provide currency for the expansion of this business. In the absence of such monetisation, they did note that ST still had to sell down its stake in Netlink Trust by 2018 – subject to sufficient take-up of fibre services.
 
Price catalyst
12-month price target: S$4.15 based on a Sum of Parts methodology.
 
Catalyst: Improved performance in Singapore, India and Indonesia.

Source: Macquarie Research - 6 Jun 2014