SINGAPORE (Jan 23): DBS Group Research is reinstating coverage for Singapore Telecommunications with a “buy” rating, with the expectation that the telco’s digital business will turn profitable at the pretax earnings level in 2019.

According to Sachin Mittal, DBS’ research analyst, SingTel’s digital advertising and cybersecurity businesses – collectively its digital businesses – could turn positive on the earnings before interest, taxes, depreciation and amortisation (EBITDA) level in as early as FY19.

Driving that growth is the cyber security business which could see annual EBITDA increase from S$10 million in FY16 to S$54 million in FY19. Mittal believes the global demand for managed security services providers to counter cyberattacks, and the increased connectivity coming from the local Smart Nation Programme would boost the need for SingTel’s cyber security capabilities.

At the same time, the reduction in EBITDA losses from the digital advertising business from the current S$150 million to S$180 million levels to between S$20 million and S$30 million, could contribute between S$150 million and S$200 million to group EBITDA when combined with cyber security’s earnings.

“In our view, network advantage is likely to fade away in the long term as most telcos are likely to move towards a shared 5G network model to save capex. Telcos with robust digital offerings on top of commoditised network access will be well positioned to capture growth in the enterprise space,” explained Mittal in a note on Monday.

In fact, Mittal believes the potential IPO of Netlink Trust this year could bring SingTel’s digital businesses back into focus with investors.

At current levels, Mittal estimates that the market values the digital businesses at a negative 55 Singapore cents, given that SingTel’s core business and regional telco holdings are valued at S$4.36. “Considering the long-term growth prospects of these segments and current conditions of Singtel’s core businesses, we believe the digital segments could be conservatively valued at 10 Singapore cents,” said Mittal.

As it is, the group is expected to see a potential double-digit earnings growth at Telkomsel, which would mitigate the earnings decline at Optus for FY18 even as Singapore earnings continue to be stable. On top of that, SingTel’s increased stakes in Bharti and AIS will also likely be additional drivers for the group’s share price during the year.

DBS has a target price of S$4.46 for SingTel.

Shares in SingTel are trading 1 Singapore cent lower at S$3.80 on Monday.