SingTel, the biggest telecommunications company in Southeast Asia hit its highest trading price of $4.08 on 31 July, before beginning its pullback. Closing at $3.91 yesterday, SingTel is currently trading at its 50-day moving average price.
 
Macquarie Equities Research (MER) issued a report on SingTel on 14 August, maintaining their ‘Outperform’ rating with a 12-month target price of $4.34. Here are some excerpts from the report.
 
MER reiterates their Outperform rating on SingTel, MER’s top pick in the Singapore telecom space with an increased price target of S$4.35 (prev. S$4.15) following the release of 1Q FY15 results and updates to MER’s estimates for AIS and Bharti. In addition to positive developments in its consumer businesses in Singapore, Optus in Australia also appears to be showing positive signs in arresting its revenue and EBITDA slide. Pricing pressure in basic internet services is having an impact but new products and services are helping mitigate this impact on overall profitability. Meanwhile, a stabilising of regional currencies coupled with improved profitability at key associates should provide further rerating catalysts for SingTel’s shares which trade at an adjusted EV/EBITDA of 7.2% and offer a 4.6% dividend yield.
 
Impact
Growing mobile revenues to receive added boost. 1Q FY15 results showed SingTel gaining further revenue market share in the mobile segment (+0.2ppt QoQ to 55.4%). These revenues could in MER’s view receive a further boost from the introduction of new post-paid plans which bundle Wi-Fi and added SMS and voice minutes for a S$3 higher price-point. In addition to raising ARPUs, these plans they believe are designed to increase stickiness and improve the user experience further.
 
Enterprise repricing. 1Q FY15 results did show the impact of competition on traditional enterprise revenues (data & internet revenue -2% YoY) but MER notes that new services (business solutions revenues +18% YoY) are mitigating the impact of this competition.
 
Optus- turning around? While Optus revenues were down 2.6% YoY, there was signs of stabilisation in the mobile business (service revenues -0.8% YoY from 3-4% in previous quarters) while the acquisition of Optus stores has helped bring down costs. Management also pointed to the increased visibility of the Optus brand with its new plans helping spur usage and revenues.
 
Earnings and target price revision
MER adjusts their FY15-17E core profit estimates by -2.2% to +1.4% on these results as well as new estimates for Bharti and AIS. MER’s sum-of-parts derived price target rises from S$4.15 to S$4.35, largely on a higher valuation for AIS.
 
Price catalyst
12-month price target: S$4.34 based on a sum of parts methodology.
Catalyst: Delivery of improved results and rerating of key associates.
 
Action and recommendation
SingTel is MER’s top pick in the Singapore telecom market. In addition to steady core operations, MER see potential catalysts from a rerating of its key associates, particularly in India and Indonesia as the market factors in improved operating conditions in these markets.

Source: Macquarie Research - 20 Aug 2014