DBS upgrades Singtel to 'buy' after associate Bharti Airtel announces imminent tariff hikes

Singapore

DBS Equity Research has upgraded Singtel to a "buy" from "hold", with a target price of S$3.60 after India's top three telecom players announced tariff hikes to end a bruising price war that was getting out of hand.

The development is seen as positive for Bharti Airtel, a Singtel associate.

Singtel shares closed up S$0.07 or 2.1 per cent at S$3.33 on Friday. For the week, the counter was up 4.7 per cent.

The increase in tariffs start from Dec 1 and DBS analyst Sachin Mittal said he expects a sharp rise in regional associates' profit contribution for fiscal year 2021.

"It has been the most critical factor in Singtel's share price performance historically. Despite weakness in Singapore and Australia, we raise Singtel's FY21 forecast underlying profit by 2 per cent due to a healthier Bharti," he added.

A 10 per cent mobile tariff hike at Bharti may contribute additional 3 per cent earnings to Singtel.

Overall, Singtel offers annual earnings growth of 8 per cent over FY20 to FY22, coupled with an over 5 per cent yield, said Mr Mittal.

After Singtel released its Q2 2020 results earlier in November, some analysts have projected a 7 per cent cut to its FY20/21 earnings. This was in line with DBS's current projections.

The cuts were largely made due to weakness in Australia and Singapore. Mr Mittal said he did not see further earnings cuts as average revenue per user in India has ample room to rise after having declined 30 per cent over the last three years.

DBS has raised its fair value of Bharti to 500 rupees from 340 rupees earlier as well as hiked Singtel regional associate Advance Info System's fair value to 266 baht from 222 baht.

Bharti shares closed at 426.85 rupees on Thursday. The counter jumped 8.1 per cent to 444.65 rupees on Tuesday following its tariff hike announcement.

A potential exit from its digital businesses via a sale to a strategic investor or public listing, which Singtel is open to, would also potentially help drive its share price up, said DBS.

Separately, India on Wednesday said it will defer spectrum payments due from telco companies for two years to help an industry ravaged by a prolonged price war, mounting debts and a court decision last month demanding US$13 billion in overdue fees. Telcos now have until end of March 2022 to make their payments.