Despite the 38% rise in the valuation of regional associates over the last three years, Singtel has been flattish, due perhaps to mounting losses in the digital businesses.
In a Monday report, DBS analyst Sachin Mittal says investors currently bundle the core and digital businesses together whereby digital losses dilute the total EBITDA, leading to a lower EV/EBITDA multiple.
But Mittal expects the valuation discount to disappear given digital advertising arm Amobee on earlier-than-expected EBITDA breakeven in 1Q18 and official guidance for narrower digital losses in FY18.
“In our view, robust digital offerings on top of network access will be a major competitive advantage in the Internet of Things (IoT) era,” says Mittal, “We argue that investors ought to value the core business at 7x and value the digital business separately based on revenue multiple even though it is not profitable yet.”
According to DBS’ analysis, Singtel could also pay special dividends of $600 million-$1.5 billion taking total FY18 yield to 6.0-7.5% without exceeding 2 times net debt-to-EBITDA.
“We use a sum-of-the-parts (SOTP) valuation for Singtel to derive a target price of $4.30. The stock offers about 17% upside potential in addition to 6.0-7.5% yield,” says Mittal.
Shares in Singtel are up 3 cents at $3.71 or 10.5 times FY18 earnings.
