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Broker’s take: DBS lowers Singtel to 'hold' after share price rally

DBS Group Research has downgraded its rating for Singtel from "buy" to "hold", saying investors may want to take some profit as the telco's recent share price rally could be losing steam.

But it also raised its 12-month target price for Singtel to S$3.60 from S$3.55 to reflect improvements in the valuations of the telco's regional associates, according to the bank's Monday equity research report.

As at 11.03am, Singtel shares were trading at S$3.49, down seven Singapore cents or 1.97 per cent.

DBS analyst Sachin Mittal noted that Singtel has rallied 23 per cent since January from a low of S$2.86, "driven by the market’s
search for yield and defensive stocks in the wake of global economic and trade woes, and steady improvements in the share prices of Singtel’s associates."

With the rally, Singtel’s holding company discount has now contracted to just 17 per cent from a high of 35 per cent, he noted. Further upside may be limited as the holding company discount is close to the five-year average of 14 per cent, along with a dividend yield below five per cent which may not appeal to yield hunters, he said.

That said, potential catalysts for further improvements in Singtel's share price include a mobile tariff-hike in India, the stabilisation of core-operations in Singapore and the monetisation or exit of Singtel’s digital businesses, said Mr Mittal.

An upward revision of mobile tariffs in India this year by Reliance Jio Infocomm Ltd, a rival to Singtel associate Bharti Airtel, would be a "key catalyst" for Singtel’s share price as it would indicate milder competitive conditions following nearly three years of price aggressive price wars between operators. This will allow Bharti to lift its depressed average revenue per user and mobile revenue.

Meanwhile, a potential stabilisation of Singtel’s core business in FY20F could increase the valuation of Singtel’s Singapore operations to 7.5 times FY20F EV/EBITDA versus 7.0 times under DBS’ base case, and lift its target price by S$0.05.

Singtel’s digital businesses – comprising its cyber-security and digital life segments – have also seen an improved valuation. Its cyber-security segment is valued at S$818 million, based on EV/revenue of 1.3 times, pegged to a 20 per cent discount to peer average to account for the lack of profitability of Singtel’s cyber-security operations.

Its digital life segment, largely comprising of ad-tech firm Amobee group, has been valued at an EV/Revenue of 1.05 times, at a 30 per cent discount to the average valuations of recent acquisition.

DBS projects Amobee could add S$0.04 to its current target price for Singtel as the telco plans to monetise Amobee over the next three years either through an initial public offering or a private sale. This is assuming Amobee reports 20 per cent growth in revenue in FY20F, with significant improvements in EBITDA.