SingTel – CIMB
The tough gets going
• Reliable associate earnings + risk aversion = outperformance. Reliable earnings growth from SingTel’s blue-chip regional associates should find favour with investors as risk aversion heightens. Earnings growth for SingTel’s associates is based on solid domestic market fundamentals and should be relatively insulated from a US economic slowdown.
• Singapore growth re-rated. Singapore operations surprised with 10% yoy topline growth in 1QFY08 after years of sluggishness. Singapore is poised to deliver multiyear EBITDA growth of 4-5% p.a. with new service offerings.
• 4.6% yield limits downside risks. Our above-consensus yield expectation is backed by free-cash-flow yields of 4.6% and premised on a 70% payout ratio.
• Raising earnings estimates by 1-2% for FY08-10. Robust topline growth for Singapore operations in 1FY08 has convinced us that rising costs from the launch of new initiatives should weigh less on margins than earlier expected.
• Upgrading to Outperform from Neutral; raising target price to S$4.05. Our sum-of-the-parts valuation is raised from S$4.02 on the back of our earnings upgrade. SingTel is poised to outperform the STI, with heightened risk aversion being the key catalyst. It is now our top Singapore telco pick, offering reliable earnings growth and limited downside from a 4.6% yield. This highly-liquid stock is an attractive proxy for regional telcos in a risk-averse environment, in our view.