• Top Pick: Singtel. Stock-picking remains key for investing in Singapore telcos in 2025. SIM-only competition should remain elevated in an ex-growth market, with the narrative still on industry consolidation. The sector's attractive 6-7% sector dividend yields - among the highest in the region - support sector valuations (+1SD from historical EV/EBVITDA mean). We prefer Singtel, due to its stronger ex-Singapore earnings prospects, capital management opportunities (special dividends), and structural upside from new growth engines. We remain NEUTRAL on the sector.
• Market talk of a StarHub-M1/Simba Telecom union continues to dominate; M&As could lend excitement. StarHub's management has mostly side-stepped comments on potential suitors but is receptive to a market consolidation. A merger may see it "right-size'" the acute competition in the mobile virtual network operator (MVNO) space. Broadly, we think 2025 could bring more M&A flow for the sector, helped by the interest rate downcycle and strong investment propositions specifically for infrastructure assets. Telcos are also looking to strengthen their franchise values on the "techco" journey and on the back of the artificial intelligence (AI) boom.
• Singtel's EBIT on track for low-double digit growth in FY25 (Mar). We expect ROIC to grow to 10% in FY25F from 9.3% in FY24 (FY23: 8.3%) on cost excellence and new growth engines (data centres, NCS, digital assets). EBIT from the core Singapore and Optus units grew 12.8% in 1HFY25, which puts it on track to achieve the low double-digit growth guided for the full year. We note Optus' EBIT (AUD terms) surged 58% on good cost efficiencies, while NCS' EBIT jumped 40% from higher delivery margins. Management indicated it is at the halfway mark of the SGD200m opex savings target for FY25F. Overall, we continue to see the group's mid-term capital recycling target of SGD6bn supporting the variable realisation dividend (VRD), with SGD1bn (6 cents/share) to be recognised over the next six months.
• StarHub is set to harvest the benefits of its transformation exercise; changing market dynamics could temper positives. With investments from the multi-year transformation programme (2022-2025) largely behind the group (10% incremental spending in FY25F), StarHub should start to capture the synergies and benefits from the transformation in 2025. However, the underlying impact on earnings may be more pronounced in FY26-27F, as costs associated with legacy networks taper off. The shift in the market's competitive dynamics may temper the positive outcomes from the transformation, in our view, with potentially lower revenue growth and shallower opex savings.
• Sector valuations reflect attractive yields and competitive headwinds. We deem the overall sector EV/EBITDA valuation (+1SD from historical mean) as fair and reflective of the competitive environment, supported by a dividend yield of >6% (above the regional peer average). Key downside risks: Competition, weaker-than-expected earnings and negative dividend surprises.

Source: RHB Research - 7 Jan 2025