SingTel (KimEng)

Event

We are upgrading SingTel to a BUY following the recent plunge in its share price that has pushed dividend yield to a relatively attractive 6% and valuations down to 2009 troughs. With this upgrade, we now have BUY calls on all three Singapore telcos as we expect the flight to quality to continue, with or without QE3. We also note that SingTel CEO Chua Sock Koong recently bought 728,000 shares at $3.01-3.02 per share, a sign of insider confidence. Our target price is $3.41, based on 14x FY Mar12 forecast, slightly below its peer group average of 15.2x.

Our View

While Pay TV is still under pressure, guidance is generally positive due to gains in mobile market share and data growth. EBITDA margin also appears to be stabilizing, albeit at lower levels, while competitive concerns in the broadband and Pay TV hotspots are starting to recede. With the bulge in data investments already passed, there could be more room for capital management.

In addition, pressure on regional associates in Thailand, India and Indonesia appears to be easing, with Bharti in particular having turned an important corner. Profits in the past 5-6 quarters had been strained but a prepaid tariff hike in July suggested an end to the vicious call rates war, while data growth from its 3G networks could be expected to enhance margins. Full rollout should occur by next March.

Forex challenges are likely to remain a headache for SingTel. However, we hasten to emphasise that these are mainly unrealised translation losses and will not restrict its ability to stick to its dividend payout commitment of 55-70%. With free cash flow comfortably exceeding dividend commitments, we forecast a DPS of $0.17-0.179 for FY Mar12-13, yielding 5.6-5.9%.

Action & Recommendation

During the 2008 crisis, valuations hit a low of 9x earnings and 1.6x book. Assuming they are seen again, the relevant range would be $2.20-2.60. However, the share price only hit these levels for a very brief period.