FY21 earnings for Singtel, StarHub to fall 9-10% if Covid-19 persists: DBS

DBS Group Research is expecting the Covid-19 pandemic to persist through 2020, and as such, has cut FY2021 earnings forecasts for Singapore telcos Singtel and StarHub by 10 and 9 per cent, respectively.

In a Thursday report, DBS Group Research analyst Sachin Mittal said: "Roaming revenue in Singapore (which makes up 12-20 per cent of mobile revenue) will be the biggest casualty followed by prepaid mobile revenue (which comprises 15-20 per cent of mobile revenue)."

The impact on Singtel is likely to be larger due to its exposure to the Australian market through Optus.

Singtel will be impacted by translation losses due to the 10 per cent fall in the Australian dollar against the Singapore dollar, Mr Mittal said. Likewise, Optus's roaming revenues, which account for 5-6 per cent of its total mobile revenue, are likely to take a hit too.

Nonetheless, Mr Mittal pointed out that at current levels, dividend yields for both telcos remain attractive. 

Singtel, which is trading at a dividend yield of about 5.4 per cent two standard deviations from its 15-year historical average, pays out almost 100 per cent of its free cash flow as dividends to shareholders, he noted.

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Meanwhile, StarHub is trading at a dividend yield of 7.1 per cent and may benefit from its joint bid with M1 for a nationwide 5G licence.

For earnings resilience, investors can look to telco infrastructure play NetLink NBN Trust, which is trading at around 6 per cent dividend yield.

"NetLink's net debt-to-Ebitda (earnings before interest, taxes, depreciation, and amortisation) of less than two times suggests ample room to raise debt if needed," Mr Mittal said.

In a bearish case scenario where telcos might face a fall in earnings of between 10 per cent and 15 per cent, DBS is of the view that Singtel shares could fall to S$2.18, StarHub might decline to S$1.00 while NetLink units may drop to S$0.76.

As at 10.40am on Thursday, shares in Singtel were down S$0.09 or 3.5 per cent to S$2.51, StarHub dipped S$0.01 or 0.8 per cent to S$1.26, and units in NetLink NBN Trust fell 2.5 Singapore cents or 2.8 per cent to 87 cents.