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Broker's take: DBS Group Research flags upside potential for Singtel

DBS Group Research flagged potential upside to Singtel's share price, noting a valuation discount on the telco's shares versus its regional peers.

In its Oct 2 research note, DBS stated that despite about 38 per cent rise in the valuation of regional telco stocks over the last three years, Singtel has been flattish perhaps due to mounting losses in its digital businesses.

But it highlighted an official guidance from Singtel for narrower digital losses for FY18 as well as the telco's digital advertising arm achieving an earlier-than-expected earnings break-even.

"Singtel's core plus digital business is trading at only 5.6 times of its EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation multiple) compared to seven times for M1, nine times for StarHub, and 7.5 times regional telco average," the research note stated.

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Instead of bundling the core and digital businesses together, which will lead to a lower EV/EBITDA multiple, the research note argued that investors ought to value the core business at seven times EV/EBITDA and the digital business separately even as the latter is not profitable yet.

It projected that Singtel could pay special dividends of S$600 million to S$1.5 billion taking forecast FY18 yield to between 6 per cent and 7.5 per cent without breaching a two times net debt to EBITDA ratio.

It valued Singtel at a target price of S$4.30, with a 17 per cent upside compared to the stock's last traded price of S$3.68.