Singapore Telco Sector Q2 2025 Outlook: Singtel Leads Growth, Dividends Attractive

UOB Kay Hian

Thursday, 29 May 2025

Singapore Telecommunications Sector: Overweight Outlook Maintained Amidst Muted Earnings and Regional Opportunities

The Singapore telecommunications sector presents a mixed bag of muted earnings growth and attractive dividend yields, prompting UOB Kay Hian to maintain an OVERWEIGHT rating. This comprehensive analysis delves into the sector’s 1Q25 performance, explores future growth drivers, and provides detailed insights into key players like Singtel, Starhub, and NetLink.

1Q25 Earnings Recap: Muted Growth Within Expectations

• The telecommunications sector experienced a modest 1.7% year-over-year earnings growth in 1Q25, aligning with expectations.
• Singtel’s regional associates and effective cost management underpinned this growth.
• However, this was partially offset by lower revenue and increased operating and amortization costs at NetLink and Starhub.

2Q25 Outlook: Expect Similar Flattish Earnings Growth

• The sector anticipates similar earnings growth in 2Q25, with Singtel expected to be a primary driver.
• Looking ahead to the second half of 2025, key factors to monitor include:
  • Continued strong performance from enterprise businesses.
  • Potential consolidation among incumbents.
  • Possible stake sales/divestment of Singtel’s regional associates and non-core assets.
  • Higher amortization costs from 700MHz spectrum payments.
  • Increased contributions from Singtel’s regional associates and improved profitability from Optus/Singapore.

Investment Strategy: Maintain Overweight

• UOB Kay Hian continues to favor telcos with regional exposure, citing ongoing market repair in several regional markets.
• The domestic market in Singapore faces challenges due to intense pricing competition.
• Despite downside risks to postpaid and prepaid ARPU as consumers trade down to lower-value plans, the OVERWEIGHT stance is maintained.
• This is driven by improving business outlooks, resilient earnings, and attractive 5-6% dividend yields.
• The telco sector is expected to be relatively immune to the impact of US tariffs, making it a defensive play amidst market turbulence.
• The sector has outperformed the STI year-to-date, largely due to Singtel’s share price surge.

Top Pick: Singtel (ST SP/BUY/S\$4.58)

• Singtel is favored due to its potential for earnings growth in 2025, driven by enterprise business contributions and cost-saving initiatives.
• The company offers a decent 5% dividend yield, improving ROIC, and value-unlocking initiatives like the S\$2 billion share buyback program.
• Singtel benefits from ongoing market repair across its regional markets.

Starhub (STH SP/HOLD/S\$1.26)

• Starhub offers an attractive 6% dividend yield and stands to benefit from market consolidation in Singapore.
• However, it faces greater domestic exposure and increasing operating costs.

NetLink (NETLINK SP/BUY/S\$0.98)

• NetLink is favored for its defensive earnings, sustainable revenue, and projected FY26 dividend of around 6%.

Sector Picks: Company Overview

Here’s a summary of UOB Kay Hian’s sector picks:

Source: UOB Kay Hian

Peer Comparison

Here’s a peer comparison table highlighting key financial metrics:

Source: Bloomberg, UOB Kay Hian

Singtel: Doubling Down on Unlocking Shareholder Value

• Management has set a new S\$9 billion target for capital recycling in the medium term, up from S\$6 billion previously.
• This is expected to come from reducing stakes in regional associates (Bharti Airtel and Gulf Development) and non-core fixed assets.
• Singtel may reduce its 28.3% stake in Bharti Airtel to match the Mittal family’s 23.7% stake over the next 2-3 years, potentially gaining S\$7-8 billion in cash.
• The company has identified S\$1 billion in non-core fixed assets and S\$3 billion in assets from Thailand to monetize, likely from reducing its 9% stake in Gulf Development.

Higher Dividends Expected from Singtel

• Excess cash from stake sales is expected to lead to larger core dividends, likely towards the higher end of the 70-90% underlying PATMI dividend policy for FY26.
• Singtel could pay higher value-realisation dividends (VRD) towards the tail end of its 3-6 S cents/share guidance, in line with its ST28 strategy.
• Based on estimates, every S\$1 billion in cash could lead to 5-6 S cents/share of VRD, adding approximately 1.5% to the dividend yield.
• With improved business fundamentals and a potential cash war chest of S\$12-13 billion in the next 2-3 years, Singtel could sustainably pay 6 S cents/share or more for the next 3-5 years.

NetLink: Defensive Shelter Amid Market Volatility

• NetLink is viewed as a defensive play due to its strong earnings visibility, healthy balance sheet, and cautious approach to acquisitions.
• The company offers predictable revenue streams and a lush 6% dividend yield.
• Potential downside risks include rising operating costs and lower-than-expected non-regulated asset base revenue.

Starhub: Compressed Margins Expected for 2025

• Despite reaching the end of its DARE+ investment program by end-2Q25, Starhub is expected to see significant earnings improvement only from 2026.
• Ongoing legacy costs to decommission legacy systems and higher amortization costs from the recent S\$282 million 700MHz spectrum payment in 2Q25 are expected to weigh on margins.
• The benefits of the DARE+ program and cost optimization efforts are expected to improve margins and earnings from 1Q26 onwards.
• Key risks for Starhub include weakness in the domestic consumer markets due to stiff competition.

Starhub to Lead Market Consolidation

• Singapore’s telco industry is considered ripe for market consolidation in the short to medium term due to falling mobile service revenue and sliding ARPUs.
• Singtel is unlikely to be part of any potential market consolidation due to its commanding domestic revenue market share of around 44.6%, which would likely result in regulatory issues.
• Starhub, backed by a strong balance sheet, is seen as the prime candidate to lead market consolidation, with M1 as the likeliest acquisition target.
• A Starhub-M1 merger is expected to lead to rational pricing and eventual market repair, given the combined 90% market share with Singtel.
• Downside risks may come from Simba Telecom continuing its low-price strategy even after market consolidation.

Stiff Competition in the Domestic Consumer Business

• Intense domestic pricing competition in Singapore is expected to drive customers to lower-value/SIM-only plans.
• Simba had increased its mobile subscriber count to 1,160,000 as of end-January 2025, from 487,000 at end-January 2022.
• Driven by competitively-priced 10Gbps broadband plans, Simba’s active broadband customers quadrupled to 14,347 at end-January 2025.

SINGTEL’S POSTPAID ARPU

(Source: Singtel, UOB Kay Hian)

SINGTEL’S PREPAID ARPU

(Source: Singtel, UOB Kay Hian)

SECTOR FORWARD EV/EBITDA (X)

(Source: Bloomberg, UOB Kay Hian)

SINGAPORE MARKET SHARE COMPOSITION

(Source: IMDA, Singtel, M1, Starhub, UOB Kay Hian)

SIMBA’S ACTIVE MOBILE SERVICES (‘000)

(Source: TUAS, UOB Kay Hian)