Brokers' take: RHB lowers Singtel's target price, maintains 'buy' on restrained mobile revenue recovery

WHILE Singtel Z74 remains RHB analysts' preferred Singapore telecommunications pick, they also see potential downside risk in weaker-than-expected earnings. This has led them to maintain "buy" on the telco, while reducing its target price to S$3 from S$3.30.

In a report released on Tuesday, the analysts said that they expect the year-on-year decline in mobile revenue to bottom out in the first quarter of FY2022 due to the low base effect caused by the circuit breaker in April last year and stronger economic activities under Singapore's Phase 3 reopening.

They expect revenue to rebound as international travel restrictions are progressively relaxed, which should drive a rebound in roaming and prepaid sales.

Still, RHB has adjusted its forecast core earnings for FY2022 and FY2023 by -2 per cent to +11 per cent to factor in a more restrained recovery in mobile revenue and margins in the medium term.

RHB analysts also expect Singtel's wholly-owned Australian subsidiary, Optus, to see a year-on-year recovery in mobile revenue follow through in the first quarter of FY2022 on the back of higher penetration of Optus Choice Plans, which are accretive for average revenue per user, alongside market price repair.

"We note Optus' price increase in May was followed suit by TPG Telecom recently, which should instill greater market price discipline," they said.

This will help to counter Optus' lower consumer revenue and Ebitda (earnings before interest, taxes, and amortisation) as a result of decreased national broadband network migration revenues and fixed retail margins over the past two years.

As part of Singtel's strategic review, its technology services arm, NCS, will be repositioned as an Asian business-to-business digital services provider. RHB analysts see potential for the company to further scale up digital revenue streams as it shifts towards more private sector accounts in the region and away from its mainstay in the government.

Stronger infocomm technology contributions will continue to buffer weakness in legacy carriage revenue too, supported by NCS's S$1.3 billion public sector pipeline.

As such, RHB said that Singtel's valuation is "undemanding" with its core mobile business trading at five times its enterprise value to Ebitda ratio.

As at 9.39am, Shares of Singtel traded flat at S$2.28.