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SINGTEL is being undervalued by the market as its share price suggests over 50 Singapore cents of value destruction from its digital businesses compared to a conservative estimate of a 10 Singapore cent value creation, according to DBS in its research report.
DBS expects the annual EBITDA of the cyber security segment to rise from S$10 million in FY2016 to S$54 million by FY2019. This, coupled with lower EBITDA losses in digital advertising, should add an estimated S$150-200 million to group EBITDA in FY2019 versus FY2017, according to DBS.
In addition, DBS believes that any potential double-digit earnings growth at Telkomsel should more than offset any earnings decline at Optus in FY2018, while Singapore earnings are expected to be resilient. Higher stakes in Bharti and AIS are also likely to be additional drivers over the next 12 months.
As for risks, DBS says that their projection of lower digital advertising EBITDA losses, from S$150-180 million in FY2017 to S$20-30 million in FY2018, may be too optimistic due to intense competition. Currency is also a concern as Singapore only contributes about 30 per cent of overall earnings for Singtel. As a result, strengthening of the Singapore dollar could have a dilutive effect on the bulk of its earnings.
DBS recommends a "buy" with a 12 month price target of S$4.46, an upside of 17 per cent. At 10.59am on Monday, Jan 23, Singtel was trading at S$3.80 per share.