DBS: Singtel’s negatives are already priced in

SingTel outlet in SingaporeSingTel outlet in Singapore

SingTel’s digital businesses are being valued negatively by the market, but the telco has a track record of turning around digital advertising, DBS said in a note this week.

“The market is attaching a significant valuation discount to the core plus digital business of Singtel, possibly over concerns on the magnitude of losses in the digital segment in the past,” it said.

DBS noted that the core plus digital businesses were trading at only 5.7 times fiscal 2019 enterprise value to EBITDA, compared with around 7 times for M1 and around 9 times for StarHub. EBITDA stands for earnings before interest, taxes, depreciation and amortization.

“Digital businesses should not be valued like a telco business. Due to EBITDA losses incurred in the Digital Life! and cyber security businesses, the market ascribes a negative value to them,” DBS noted, but it estimated those businesses are worth S$0.14 a share, and it values Digital Life at S$1.3 billion.

“Singtel has already shown its capabilities by turning around a loss-making digital advertising business into positive EBITDA territory,” it said.

But DBS cut its fiscal 2018 and 2019 earnings forecasts by 5-10 percent, mainly on a potential drop in contributions from Telkomsel amid a mandatory SIM registration exercise in Indonesia and cannibalization of voice and SMS revenue by cheap data. It noted Telkomsel contributed around 30 percent of Singtel’s post-tax earnings so far this year.

DBS forecast Singtel’s fiscal fourth quarter net profit at S$824 million, down 14 percent on-year. That led to a target price cut to S$3.85 from S$4.30. But it kept a Buy call.

Singtel’s earnings were due on May 17 before the market open.

The stock is up 0.57 percent at S$3.52 at 2:40 P.M. SGT on Tuesday.