• Sharply lower interest rates
• Improved DCF-based valuations
• But current prices not attractive enough

Odds of a rate hike diminishing

Following the increased volatility in the global markets after the Brexit vote (UK has voted to leave the EU), the odds of the US Federal Reserve hiking interest rate this year (or even next year) have diminished sharply, versus a possible hike as early as this month. As such, we have seen a sharp pull-back in interest rates, with 3-month Sibor easing to just 0.9375% recently, versus a peak of 1.25% at the start of the year. More importantly, we note that the benchmark 10-year Singapore government bond yield has tumbled to 1.65% of late, versus 1.92% just before the results of the Brexit vote were announced.

Fair value improves to S$4.29

And as we use the 10-year bond yield as a proxy for the risk-free rate in our DCF calculation of Singtel’s valuation, the drop would also bump up our valuation of Singtel’s core business to S$3.00; and applying the latest market value of its listed associates, our SOTP-based fair value also improves from S$4.10 to S$4.29.

However, given the recent sharp jump in Singtel’s share price over the last two weeks, we do not find current valuation attractive enough; hence, we are downgrading our call from Buy to HOLD, but we remain positive about its prospects and would look to re-engage closer to S$4.00.

Singapore market could remain status quo

Separately, the upcoming event that the market will be keeping a close watch on will be the potential entry of a 4th telco in Singapore. However, according to industry watchers, there is a good chance that the mobile market here could remain status quo i.e. business as usual for the existing three incumbents, due to difficulties in raising funds to not only bid for 4G spectrum but also to roll out the network across the island.

Some industry watchers note that the market may not need to wait for the actual auction as the hopefuls would need to submit a business plan to the authorities soon (likely before the end of Jul) to know the outcome.

Source: OCBC Research - 12 Jul 2016