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Broker's take: Singtel is Maybank KE's top telco pick on valuation grounds

"The market is ascribing almost zero value to Singtel's core operation, and the stock is supported by a forward 12-month dividend yield of 5.1 per cent, in line with its 10-year historical mean," MKE said.

MAYBANK Kim Eng (MKE) has initiated coverage on Singapore telcos with a "positive" view, citing the stocks' undemanding valuations and improving dividend visibility.

It also identified Singapore Telecommunications (Singtel) as its top "buy" idea in the sector.

"We think the worst is over and the sector should gradually recover back to pre-Covid levels," analyst Kareen Chan wrote in a note dated Monday. She foresees earnings recovery on multiple fronts.

The brokerage prefers Singtel on valuation grounds. "The market is ascribing almost zero value to its core operation, and the stock is supported by a forward 12-month dividend yield of 5.1 per cent, in line with its 10-year historical mean," MKE said.

It initiated coverage on Singtel with a "buy" and a target price of S$2.88. Singtel shares were trading at S$2.31 as at 3.08pm on Wednesday, down S$0.05 or 2.1 per cent.

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In addition, MKE likes Singtel for its geographical diversification. "We are also seeing market consolidation in Australia post the Vodafone-TPG merger, and Telstra's recent price hike suggests a favourable shift in pricing power," the analyst said.

And in India, Singtel's associate Bharti Airtel is set for an upcycle in its average revenue per user (ARPU).

After Singtel, MKE's next pick is fibre optic cable owner NetLink NBN Trust, due to its clearer dividend visibility, as 94 per cent of its revenue is secured by recurring cash flows.

As the sole operator of fibre networks with nationwide coverage in Singapore, the trust has a virtual monopoly in residential broadband connections. Most of its cash flow is also backed by fixed regulatory pricing till the end of 2022.

"Its March FY22 yield of 5.4 per cent offers better dividend visibility than many other yield plays. Its H1 FY21 dividend per unit has proven to be immune to Covid-19 headwinds," Ms Chan wrote.

MKE maintained its "buy" call on NetLink NBN Trust and target price of S$1.11. Units of the trust were trading flat at 96.5 Singapore cents as at 3.10pm on Wednesday.

As for StarHub, the research team initiated coverage on the stock with a "hold" call and a target price of S$1.32. The stock dropped S$0.01 or 0.8 per cent to S$1.30 as at 3.10pm.

MKE suggested investors "wait for a better entry point", as StarHub's forward yield of 4.9 per cent is unappealing when compared to its 10-year historical yield support of 6.3 per cent.

Within the sector, prepaid and post-paid ARPUs should start to normalise and gradually return to pre-Covid levels with the lifting of travel restrictions from 2021, according to MKE.

In the mobile segment, the telcos' market shares have remained stable despite competition from mobile virtual network operators (MVNOs), Ms Chan said.

Meanwhile, recovery in corporate IT spending will likely provide support for the telcos' enterprise divisions.

The commercialisation of 5G could lift the telcos' "long-depressed" ARPUs, given the 13-19 per cent price hikes in 5G plans, according to MKE.

The availability of 5G non-standable coverage and 5G handsets should drive uptake of new 5G plans as well.

"We project a 5G adoption rate of 15 per cent by end-2021, lower than the 3G/4G adoption rate of 24 per cent," the brokerage noted. It estimated that this would provide telcos with a 1.9-2.8 per cent increase in ARPU as early as end-2021.

With 5G, incumbents in the sector will also be able to reset the price competition with MVNOs by renegotiating wholesale prices, Ms Chan said.

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