Singtel's holdco discount grows to 22%: analyst

FY2021 earnings could rise as its Australian handset business may recover.

Singtel’s holding company (holdco) discount has expanded to 22% from 15% average over the last four years, based on the market price of associates, according to a DBS Group Research report. This follows after its stock crashed 11% as it reported its Q3 results.

DBS is expecting its associates to generate a pre-tax profit growth of 40% in FY2021, led by Bharti’s turnaround. It is also likely to counter the weaknesses seen in its Singapore and Australia operations.

Associate contributions & divestments from Q42020 are also projected to rise, whilst divestments of non-core assets may hit over $5b in the near- to medium-term.

In addition, the report added that the dividend may get cut and could see an 8% decline in core EBITDA as Singtel’s handset business in Australia may still recover. “We project annual dividend per share (DPS) of 15 cents in FY2021, although potential divestments can help to sustain 17.5 cents DPS,” it added.

“Handset business is a very thin-margin business and Optus suffered in 9M20 due to its expensive inventory of handsets which it had to sell at a loss (as per our estimates). Most customers preferred to buy handsets from retailers instead of telcos after handset subsidies were removed,” said Sachin Mittal, analyst at DBS Group Research.

He added that Optus would be more cautious in FY2021 and not build up excess handset inventory in the same period. However, Singtel’s EBITDA in Australia will likely suffer from a A$300m drop in National Broadband Network (NBN) migration fee and another A$100m rise in traffic costs as more customers switch to NBN.

Overall, Mittal said that Singtel could deliver earnings CAGR of 5% over FY2020-2022, coupled with 5% yield.

However, the report noted that they are assuming a 20% drop in the market of associates and a 20% drop in our valuation of the core business as the bear-case valuation of $2.75 implies 3% downside risk.