Singapore Telecommunications Singtel’s ROIC could improve in the next two years

Price target:

DBS Group Research ‘buy’ $3.18

Sachin Mittal of DBS Group Research has raised his target price for Singapore Telecommunications (Singtel) to $3.18 from $3.15 on projections that the telco will be able to improve its return on invested capital (ROIC) in the coming two years.

“Singtel’s share price has demonstrated a positive correlation of 89% with its ROIC, implying when the ROIC performs better, the share price inches up,” writes Mittal in his Feb 9 note. ROIC is measured using a company’s profitability as the percentage of total capital employed, a combination of book value and net debt.

In May 2020, Singtel’s share price dropped by 26% to $2.50, and then the telco’s ROIC dropped from 8% to 5% because of weakened core business and lower contributions from the regional associates.

At this level, Singtel’s ROIC was below its weighted average cost of capital at 6.5%. “The WACC of a company often acts as a breaking point for the ROIC, resulting in a significant movement of the stock price,” observes Mittal.

Mittal projects Singtel’s ROIC to increase by 190 basis points over the next two years, led by a sharp recovery in its associate in India, Bharti.

Other factors contributing to the lift include further divestment of non-core assets and the recovery in mobile roaming revenue across the region.

In addition, Singtel might enjoy potential catalysts in the form of special dividends to be dished out over the coming two years. This will be on top of the expected 14.5 cents in regular dividends, which implies a yield of 5.7%.

In an earlier note on Feb 7, DBS lauds Singtel’s regional data centre ambitions, with a total of 170MW in data centre capacity come 2025. For 1HFY2023 ended September 2022, Singtel generated operating earnings of $86 million from its Singapore data centre business. Applying a 20 times EV/Ebitda multiple makes the current data centre business worth $3.2 billion. If a strategic investor takes a one-third stake, that is $1 billion in cash that could be unlocked, notes DBS. —