• We see further share price upside for SingTel (SGX:Z74), even after the rebound from a decade low in March. At -1.5SD from the post-GFC EV/EBITDA mean (2SD below 5- year mean), valuations suggest downside risks are priced in.
• Near-term headwinds aside, the group’s favourable risk-reward profile, diversified earnings base, and dividend yields that trump the ASEAN-4 telco sector average, should still drive longer-term outperformance.

Roaming Weakness – Expect a Subdued Start to FY21

• We see SingTel’s consumer revenue being impacted by the sharp 51%/45% y-o-y fall in inbound/outbound travelers in February. Roaming makes up about 20% of its Singapore mobile service revenue, but much less for Optus (~5%). The impact will be compounded by the typical weak revenue seasonality in the March quarter (1Q20) and timing of handset launches.
• As more countries have since implemented strict border controls and lockdowns (extended to 1 Jun domestically), the full brunt of the roaming impact should be felt in 1QFY21, ie June.
• We cut SingTel's FY20-22F core earnings by 2.8%, 5.7%, and 4.6%, after imputing weaker roaming revenues on the overall consumer business, and the slide in AUD/SGD (-6% YTD) which affects Optus.

Dividend Looks to be Recalibrated

• We see some risk to dividend payouts ahead, which largely hinges on the group’s capex intensity (FY20 capex guided at SGD2.2bn). There could be a fine line here, as the group may want to be ahead of the game when 5G makes landfall.
• Recent media reports of Optus exploring a tower sale to raise up to AUD2bn might be a shot in the arm, providing some buffer for dividends. We also think management may want to keep its powder dry, taking on a more prudent stance on capital allocation due to the economic uncertainties.
• SingTel’s DPS guidance was for an absolute payout of 17.5 SG cents for FY19-20. We tone down FY21-22F DPS to 16 cents, from 17.5 cents.

Associates – Some Challenges But Overall Recovery Trend Intact

• The extended lockdown in India (until 3 May) could impact SingTel’s India associate, Airtel, due to the high dependence on traditional recharge methods (affecting > 30m subs) – although the industry-wide re-pricing last Dec (4Q19: +5% q-o-q) should see ARPU rising further in 1Q20 Management sees little outright impact from its other associates, namely Telkomsel in Indonesia, Globe in the Philippines, and Advanced Info Service in Thailand.
• SingTel also noted that competition has intensified in Thailand with the re-introduction of unlimited prepaid plans, while the flight to better quality services is benefitting Telkomsel.
• Upgrade to BUY from Neutral. Target Price: SGD 3.30.

Source: RHB Invest Research - 24 Apr 2020