Is Singtel Still a Buy After Its Strong 2025 Rally?

Core Viewpoint - Singtel has experienced a significant increase in its share price in 2025, outperforming the Straits Times Index, raising questions about potential upside as an interest rate cut is anticipated [1] Financial Performance - In the first quarter of FY26, Singtel reported a 14% year-on-year increase in underlying net profit, driven by strong EBIT from Optus and NCS, along with higher contributions from regional associates Airtel and AIS [2] - The net profit reached nearly S$2.9 billion, largely due to S$2.2 billion in exceptional gains from the partial sale of its Airtel stake and the Intouch-Gulf Energy merger [3] Growth Drivers - Optus saw a 4% year-on-year revenue increase to approximately A$2 billion, with EBIT rising 36% year-on-year to A$133 million, attributed to higher mobile ARPU and effective cost control [4] - NCS's revenue increased by 4% year-on-year to S$733 million, with EBIT up 22% year-on-year, supported by stronger margins and a healthy project pipeline, securing S$0.7 billion in bookings in 1Q FY26 [4] - Airtel India's profit after tax more than doubled due to a mobile price increase, while AIS experienced strong growth in mobile and fixed broadband [5] Challenges - Domestic revenue in Singapore remained flat, with mobile service revenue declining by 11% year-on-year due to weakened roaming and voice services [6] - Optus continues to face challenges in reputation recovery following a data breach incident in 2022, and competition in the Australian telecom market remains intense [6] Valuation Concerns - Analysts suggest that Singtel's shares may be overvalued, with Morningstar estimating a fair value of S$3.67 per share, while the stock traded at S$4.39 per share recently, indicating a valuation close to 1.2 times its fair value [7] Dividend and Capital Management - Singtel has committed to a dividend payout ratio of 70% to 90% of its underlying net profit after tax, with plans to enhance payouts through a "value realisation dividend" [8] - The company has raised its asset recycling target to S$9 billion, allocating S$2 billion for share buybacks to enhance shareholder value [9] Investment Outlook - The bullish case for Singtel includes strong growth from associates, potential recovery of Optus, execution of NCS projects, active capital recycling, and a sustainable dividend payout [10] - However, the recent share price increase may indicate overstretched valuation, coupled with headwinds in the Singapore mobile business and ongoing risks associated with Optus [10]