In his Aug 22 note, Mittal points out that between 2009-2017, there was a 69% correlation between Singtel’s share price and aggregate market cap of its associates: Bharti Airtel, AIS, Telkomsel & Globe.
As Singtel's core EBIT, which excludes associates, started to decline post-3QFY2018 due to rising competition in Singapore and Australia, this correlation weakened to -16%. This was also reflected in the high holding company discount of 52%.
"With improving core EBIT and opportunistic divestments, this correlation has revived to 63% in the last one year which suggests further reduction in HoldCo discount to
below 10% from 24% now," says Mittal.
Singtel's share price, according to the analyst, is set to be supported by its active capital management programme, including prospects of higher value realisation dividends (VRD).
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Operations-wise, the company will see benefits of market consolidation in Singapore, even though it is not a party to any of the recent M&A deals.
From the higher core earnings from operations, Singtel may then redeploy capital to accelerate core EBIT growth through data centres and a fledgling business of selling GPUs as a service.
Mittal has raised the value of Singtel’s associates to $4.10 per share, up from a previous valuation estimate of $3.66, as he switches from market prices to consensus’ target prices of associates, assuming a 10% HoldCo discount.
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For the unlisted Telkomsel, Mittal has raised his 12-month forward PE from 11.3x to 15x, on expectations of a structural recovery from the current quarter.
Singtel's core business, meanwhile, is kept at 18.5x 12-month forward P/E ratio (unchanged), at 94 cents per share, thereby deriving a new target price of $5.04.
Key risks flagged by Mittal include a decline in the Australian dollar, which will affect the earnings reported in Singdollar. Irrational competition in Australia could
hinder recovery as well, he warns.
Singtel shares changed hands at $4.14 as at 9.49 am, up 0.73% for the day and up 33.98% year to date.
