• Astute stock-picking still key; Singtel remains our Top Pick. We see the stronger GDP growth and peaking interest rates as supportive of Singapore’s telecommunications sector (SG telcos) in 2024F. Sector FY24F EV/EBITDA of 9.4x is fair (-1SD from historical mean), given the mature stage of the market, and at a premium to the ASEAN-4 average of 6x. This is justified, in part, by superior yields. Singtel is our Top Pick, being a regional sector bellwether and a core telco portfolio constituent.

• Earnings momentum and dividend outlook. The SG telcos notched <1% return in 2023 (FSSTI: -0.3%, YTD: -2%) on stock-specific issues and earnings headwinds (investments in new capabilities and inflationary pressures). We see sector core EBITDA growing by c.12% YoY in CY24F from +7% YoY in 2023, largely from better operational numbers and cost restraint. SG telcos continue to offer the highest dividend yields among the ASEAN-4 telcos, at 5.5% on average for FY24F. This compares with the 4% in Malaysia, 2.7% in Indonesia, and 3.5% in Thailand.

• Roaming recovery gathers pace. We see a further normalisation of industry roaming revenues in 2024 to pre-pandemic levels (currently at 60- 70%) from the pick-up in visitor arrivals. This comes on the back of the reciprocal visa-free scheme extended to inbound China travellers, which is set to be implemented soon, and additional flights between the two countries. Overall, industry blended mobile ARPU (9M23: +3.3% YoY) should be supported by stronger 5G monetisation and rational competition.

• Singtel – stronger ROIC, dividend upside. We see: i) Continued ROIC improvement (low double-digit target by FY26F) from cost-saving initiatives (SGD0.6m targeted into FY26F) and synergies from the combined Singapore mobile and enterprise operations; ii) potentially higher dividends (including specials) from capital recycling (SGD6bn targeted) as share price catalysts. While mid-term headwinds (higher churn) are expected for Optus after last November’s major network incident, we believe market price reparation remains a strong underlying catalyst. Post 1HFY24F results, management raised DPS guidance to 70-90% of core PATAMI (from 60- 80%). We project 12.9% FY24-FY26F core earnings CAGR.

• StarHub – uncertainties despite lower transformation spending. The company is mid-way through its multi-year (2022-2025) transformation programme (DARE+), which is set to strengthen its core focus and offerings (Infinity Play) in the longer term. While management guided for lower DARE+ spending at its recent 2023 Investor Day, ie of SGD270m (SGD310m previously), the benefits and positive synergies will likely take time to accrue – with execution and weaker-than-expected transformation outcomes still being key downside risks, in our view.

• Key downside risks: Intensifying competition, weaker-than-expected earnings, and the negative effect of external macroeconomic developments. A sector consolidation portends upside risk.

Source: RHB Research - 17 Jan 2024