SingTel – DB

Underlying valuation now attractive

Now is the time to revisit STel; Upgrade to Buy
After a period of being cautious on STel, we are now more positive and upgrade it to Buy. We had previously argued that the implied valuation of the Sing/Australia business was too high and that it did not deserve to trade at a NAV premium. But recent price movements have eroded these arguments. Therefore, although we trim our target price to S$3.23 on various factors, we view current valuations as attractive and recommend Buy. Furthermore, we expect STel to become relatively more defensive although emerging market & FX exposure risks remain.

Underlying valuations now attractive
For much of 2008, STel traded at a NAV premium while Sing/Australia was often more expensive than the listed Associates. But STel now trades at a NAV discount and the core Sing/Australia ops have de-rated to 11-12x fwd PE (vs 20x at the peak). And as there is a strong correlation between the Sing/Australia fwd PE and subsequent STel price trends, any further downside should be limited. Given the NAV discount and the reduced core fwd PE, we view current prices as attractive.

Although forecasts and target price trimmed
We however trim our forecasts to reflect 1H08 performance, recent FX trends and recent adjustments to Associate forecasts. For example, FY09e underlying NPAT is reduced -12% to S$3.37bn especially as recent FX trends will impact 3Q09. Furthermore, FX changes, estimate revisions and new Associate valuations reduce our target price by 52 cents/share to S$3.23 (-14% on previous published).

Revised S$3.23 TP and upgrade to Buy. Risks: FX & competition
Our S$3.23 SOTP TP is based on S’pore S$0.88/share (DCF: 7.1% WACC, 0%g), Optus S$0.78/share (DCF: 9.6% WACC, 1% g), DB covered listed Assocs at TP, non-DB covered listed Assocs at market value and investment value for others. Given current valuations, the NAV discount and the reduced Sing/Australia fwd PE, we are now Buyers especially as we believe STel should be increasingly price defensive. Risks to our view and Buy rating include adverse FX trends, increasing competition and an emerging market sell-off.

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