• Growing need for digital security services
• NLT IPO limits downside risks
• Reiterate BUY

Focusing on areas with high growth potential

We remain positive over Singtel’s growing exposure to high growth areas – cyber security, digital marketing and data analytics. According to market watcher Gartner, worldwide spending on information security is expected to grow 7.6% YoY to US$90b in CY17 and reach US$113b by 2020.

Gartner also stated that spending on enhancing detection and response capabilities is expected to be a key priority for security buyers through 2020. Gartner expects worldwide business intelligence and analytics market to grow 7.3% YoY to US$18.3b in CY17, and reach US$22.8b by end of 2020. In our view, the analytics capabilities are complementary to digital marketing effectiveness as customers are able to better utilize relevant data analytics to improvement the effectiveness of digital marketing campaigns.

According to a survey conducted by Gartner, the top three specific digital technologies that are expected to have the most potential to transform organizations over the next five years are advanced analytics, internet of things (IoT) and digital security. Hence, we believe Singtel is well poised to benefit from these trends through its exposure from its: 1) cyber security unit, Trustwave, 2) digital marketing entity, Amobee, and 3) advanced analytics and intelligence unit, DataSpark.

May return excess capital from NLT IPO to shareholders

As highlighted previously, Singtel has an undertaking to IMDA to divest its stake in NetLink Trust (NLT) to less than 25% before 22 Apr 18, and has already started preparation for the IPO of NLT. For 3QFY17, revenue and EBITDA of NLT grew 12% and 11%, respectively, while net profit rose 42% to S$32m. Management has also said the proceeds raised from the IPO may be used for M&A, and excess capital could be returned to shareholders. In our view, while it is still early days, potential special dividends arising from this IPO would help limit investors’ downside risks.

Reiterate BUY

On aforementioned reasons, we reiterate BUY and S$4.25 fair value estimate on Singtel given its long-term growth prospects and resilient earnings on the back of its diversified portfolio of businesses.

Source: OCBC Research - 31 Mar 2017