ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa:YM, PY

BUY (Re-instating coverge)

Last Traded Price ( 20 Jan 2017): S$3.81 (STI : 3,011.08) Price Target 12-mth: S$4.46 (17% upside) Potential Catalyst: Spectrum auctions in Australia, Singapore and potential IPO of NetLink trust in 2017 Where we differ: FY17F EPS slightly below consensus Analyst Sachin MITTAL +65 6682 3699 sachinmittal@dbs.com

What’s New Singtel buying opportunity due to undervalued

digital business; expected to turn around in FY19F

Digital business a key growth driver in the 5G era

Recommend BUY on TP of S$4.46

Price Relative

Forecasts and Valuation FY Mar (S$ m) 2016A 2017F 2018F 2019F Revenue 16,961 16,611 16,828 17,144 EBITDA 7,801 8,059 8,331 8,702 Pre-tax Profit 5,444 5,492 5,698 6,001 Net Profit 3,871 3,898 4,044 4,258 Net Pft (Pre Ex.) 3,814 3,898 4,044 4,258 Net Pft Gth (Pre-ex) (%) (0.6) 2.2 3.7 5.3 EPS (S cts) 24.3 23.9 24.8 26.1 EPS Pre Ex. (S cts) 23.9 23.9 24.8 26.1 EPS Gth Pre Ex (%) (1) 0 4 5 Diluted EPS (S cts) 24.3 23.9 24.8 26.1 Net DPS (S cts) 17.5 17.9 18.6 19.6 BV Per Share (S cts) 157 160 167 174 PE (X) 15.7 16.0 15.4 14.6 PE Pre Ex. (X) 15.9 16.0 15.4 14.6 P/Cash Flow (X) 18.4 13.3 18.0 17.6 EV/EBITDA (X) 9.0 8.9 8.7 8.5 Net Div Yield (%) 4.6 4.7 4.9 5.1 P/Book Value (X) 2.4 2.4 2.3 2.2 Net Debt/Equity (X) 0.4 0.4 0.4 0.4 ROAE (%) 15.6 15.3 15.2 15.3 Earnings Rev (%): (8) - - Consensus EPS (S cts): 24.4 25.9 27.4 Other Broker Recs: B: 14 S: 0 H: 8

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

Opportunity in undervalued digital business Digital business to underscore the stock price. Singtel’s share price suggests over 50 Scts (per share) of value destruction from digital businesses (mainly digital advertising and cyber security) versus our conservative estimate of a 10-Sct value creation. Potential IPO of Netlink Trust in 2017 could bring the focus on the value of digital businesses in Singtel. Digital businesses to turn EBITDA positive in FY19F, to be the key driver in the 5G era. We project the annual EBITDA of the cyber security segment to rise from S$10m in FY16 to S$54m in FY19F. This, coupled with lower EBITDA losses in digital advertising, should add an estimated S$150-200m to group EBITDA in FY19F versus FY17F. 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. Near-term drivers in place. Potential double-digit earnings growth at Telkomsel should more than offset any earnings decline at Optus in FY18F while we expect Singapore earnings to be resilient. Besides, higher stakes in Bharti and AIS will be additional drivers over the next 12 months. Valuation: We use a sum-of-the-parts (SOTP) valuation for Singtel to derive a target price of S$4.46. The stock offers ~18% upside in addition to a FY17F (March Year End) yield of ~5%. Key Risks to Our View: Digital advertising business may continue to have stable or higher EBITDA losses. Our projection of digital advertising EBITDA losses to reduce from S$150-180m in FY17F to S$20-30m in FY19F may be too optimistic due to intense competition. Currency risk a concern. Singapore only contributes about 30% of overall earnings for Singtel. As a result, strengthening of the Singapore dollar could have a dilutive effect on the bulk of Singtel’s earnings. At A Glance Issued Capital (m shrs) 16,329 Mkt. Cap (S$m/US$m) 62,214 / 43,619 Major Shareholders (%) Teamsek Ltd 52.3

Free Float (%) 47.7 3m Avg. Daily Val (US$m) 53.0 ICB Industry : Telecommunications / Telecommunications

DBS Group Research . Equity 23 Jan 2017

Singapore Company Guide

SingTel Version | Bloomberg: ST SP | Reuters: STEL.SI Refer to important disclosures at the end of this report

87

107

127

147

167

187

207

3.1

3.3

3.5

3.7

3.9

4.1

4.3

4.5

4.7

4.9

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Relative IndexS$

SingTel (LHS) Relative STI (RHS)

ASIAN INSIGHTS VICKERS SECURITIES Page 2

Company Guide

SingTel

WHAT’S NEW

Singtel seems undervalued Market placing a discount on digital businesses: Our sum-of-the-parts valuation suggests that Singtel is being undervalued by the market. Our valuations indicate Singtel’s core business and regional telco holdings alone would amount to a valuation of ~S$4.36 per share, indicating a negative S$0.55 per share valuation for Singtel’s digital businesses (mainly digital advertising and cybersecurity). However, 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 S$0.10.

Sum-of-the-parts valuation for Singtel

Per share (S$)

Equity value of the core business 1.77

Regional telco investments 2.59

Singtel's valuation ex-Digital 4.36

Digital businesses 0.10

Share value 4.46

Source: DBS Bank

Core businesses (excluding Cyber Security) worth S$1.77 per share: We use an FY18F EV/EBITDA of 8.5x to value Singtel’s Singapore business. SingTel’s local peers M1 and StarHub at present trade at an FY18F EV/EBITDA of 7.4-8.1x. We are conservative in our valuation as StarHub and M1 are more vulnerable to the fourth player's entry and competition in Singapore. Singtel’s Singapore mobile business only accounts for 13% of its total revenue. Similarly, the Australian integrated telco segment is currently trading at an EV/EBITDA of 7.3x while market leader Telstra is currently trading at an EV/EBITDA of ~7x. Hence, we have conservatively used an FY18F EV/EBITDA of 7x to value Optus.

Equity value of the core business in Singapore and Australia

Source: DBS Bank

Regional telco investments (including 5% holding company discount) are worth S$2.59 per share: We value Singtel’s holdings Airtel, AIS and Globe using current market prices and exchange rates. We apply a 22x PER for Singtel’s 35% stake in Telkomsel (TLKM is trading at ~21x), at current exchange rates. By applying a holding company discount of 5% for Singtel’s regional telco investments, we arrive at a value of S$2.59 per share.

Equity value of the regional investments

Source: DBS Bank

Digital businesses worth S$0.10 per share: As digital businesses are still at their growth stage, we believe a profit-based valuation metric would be unsuitable to value the segment’s contribution to Singtel’s share price. Considering Singtel’s continued investment in the segment and the growth seen, we believe Singtel’s digital businesses would have grown in value since the acquisition by Singtel. As a result, we conservatively value the segment at cost, only using the largest investments, with a 25% acquisition discount. This comes to a valuation of S$0.10 per share.

Equity value of the digital businesses

Source: DBS Bank

Dig i ta l bus ine ss Va lue (S$m) Pe r Sha re (S$)

Trust wave 1158

Amobee 459

Adconion 336

Kontera 215

2168

Acquisition discount (25% -542

Va lue of d ig i ta l bus ine 1626 0.10

Regional telco investments

Share price

Exchange rate Stake

Value (S$ m)

Per Share (S$)

Airtel 318 47.81 36.5% 9703.1AIS 156 24.8 31.8% 5928.1Globe* 1674 34.88 47.2% 2989.4

FY18F PER

Exchange rate Stake

Value (S$ m)

Telkomsel 22 9359 35.0% 26961Total 45581Holding company discount (5%) -2279.1Net investment holdings 43302 2.59

ASIAN INSIGHTS VICKERS SECURITIES Page 3

Company Guide

SingTel

Optus weakness to be more than offset by associate growth

Device repayment plan (DRP) credits hurting Optus's performance: In February 2015, Optus introduced device repayment plan credits, which amortised the handset subsidy costs of Optus over the contract period (12 or 24 months) instead of realising it upfront. Due to the timing difference in the accounting treatment, Optus has enjoyed elevated EBITDA levels since 1Q16. However, as a higher number of

Optus’s subscribers move to DRP credit plans, we are seeing its EBITDA normalising. The impact of DRP credit is expected to intensify till February 2017 (24 months since initial DRP launch), when most of Optus's subscribers will be on DRP-based plans, at which point the EBITDA is expected to stabilise. As a result, we expect Optus to see improvement in EBITDA levels post 4Q17, though FY18 EBITDA is expected to be lower y-o-y due to the lower starting EBITDA.

Source: Company, DBS Bank,

Spectrum auction in Australia could increase rural competition: The Australian Communication and Media Authority (ACMA) is expected to auction off previously unsold 10MHz and 5MHz blocks of 700MHz spectrum in 1H17. Telstra and Optus currently already own 700MHz spectrum while Vodafone was keen to acquire the available spectrum to expand rural coverage. However, due to interest shown by other parties, ACMA decided on having competitive auctions for the spectrum rights. If Vodafone wins some part of the 700MHz spectrum at the auction, this could make the company more competitive in low-density areas. However, Vodafone may not be able to pay a high price if competitive bidding takes place, which will likely limit its spectrum acquisitions and hence impact on Optus.

High-capex environment in Australia to temper profitability of Optus in FY18F. Telstra, the market leader, has allocated over A$3bn over the next three years for network expansions and digitisation efforts, to facilitate growing demand for data while further strengthening its dominance in rural Australia. Similarly, Optus is in the second year of a three-year high capex cycle. The company expects to spend A$3.5bn in the two years' ending March 2017. The high capex spend is expected to result in notably higher depreciation costs for Optus, which is likely to further dampen earnings in FY18.

Exposure to one of the fastest-growing telecom markets through Telkomsel. The No. 4 player in Indonesia - Hutch continues to be rational to improve its cash flow generation. This is a key factor in maintaining a rational competition in the Java region. On the other hand, Telkomsel generates close to 60% of revenues outside the Java regions, where it is too dominant with over 80% market share. Telkomsel has mitigated the impact of any decline in the usage of voice services by implementing cluster-based pricing strategies, where customers are charged different rates for voice services based on their locations. Despite tightening competitive dynamics in ex-Java regions, we believe Telkomsel’s bottom line would continue to grow over the medium term and we project a 16% growth in earnings contribution from Telkomsel in FY18F.

Increase of stakes in AIS and Bharti should provide added support. Singtel has increased its stakes in Intouch PLC (majority shareholder of AIS) and Bharti Telecom (majority shareholder of Airtel) by 21% and 7.39% respectively. This expands Singtel’s effective stake in AIS from 23.3% to 31.8% and the effective stake in Airtel from 33.1% to 36.5%. The higher stakes should account for a much greater contribution from AIS and Airtel even with limited improvement in their profitability.

non‐DRP Full DRP

Handset Price 984 984

Handset Payment (advertised) 240 984

Initial subsidy 744 0

Upfront payment 0 0

Monthly Service Fee 60 60

Monthly Handset Repayment 10 41

Monthly Credit ‐31

70 70

Total Payments over 24 months 1680 1680

Subsidy on customer activation (A) ‐744 0

Monthly Service Revenue (B) 60 29

Total P/L impact (A+24xB) 696 696

Customer

Payments

P/L

impact

Subsidy realized upfront in non‐DRP

Subsidy realized overtime in DRP

Net impact neutral

ASIAN INSIGHTS VICKERS SECURITIES Page 4

Company Guide

SingTel

Digital businesses to be EBITDA positive by FY19: Given the high demand for Cyber Security services, this segment is expected to contribute S$54m to EBITDA by FY19. In addition, we are likely to see Digital Life’s (primarily Amobee's) EBITDA losses reducing significantly as revenues ramp up. We believe this would result in a S$150-200m addition to EBITDAs by FY19 compared to FY17.

Cyber security

Managed security services providers (MSSPs) are on an upward growth trajectory: Singtel strengthened its managed security services with the acquisition of Trustwave in 2Q16, a leading MSSP based in the US. According to research firm Frost & Sullivan, the global demand for MSSPs is expected to grow robustly at a CAGR of 13% from 2014-2018, backed by the increasing complexities of cyber-attacks, shortage of cybersecurity professionals and rising demand from Small and Medium Enterprises. Demand from the APAC region is set to outpace global growth with a CAGR of 15%, reaching US$3.77bn by 2018. Singtel would be able to capitalise on the growing demand for MSSPs by combining its position as a leading network service provider in the region with the newly acquired security capabilities of Trustwave.

Singapore’s Smart Nation Programme could help cyber-security EBITDA to grow 10x over FY17-FY19: Singtel expects its Cyber Security segment to record a revenue of S$450-550m in FY17. Trustwave (bulk of Cyber Security business) recorded a positive EBITDA of S$3m in 2Q17. Singapore’s Smart Nation Programme aims to connect every aspect of city life including transportation, health, waste management, etc. with the help of the Internet of Things (IoT) and Big Data. The need for robust cybersecurity measures for the Smart Nation Programme could drive demand for Singtel’s cybersecurity capabilities, in our view. As a likely provider of network infrastructure facilitating the Smart Nations Programme, Singtel would naturally be among the favourite candidates for monitoring and managing the cybersecurity assets of the Smart Nation Programme.

Peer trajectory suggests Cyber Security could achieve ~10% EBITDA margin by FY19. Trustwave’s slightly larger peer in the MSSP space, Dell SecureWorks has been less successful in achieving positive EBITDAs. We believe this is mostly due to the higher sales and marketing expenses the company incurs (25-30% of revenue). Singtel’s close ties to the Singapore government and the upcoming Smart Nation projects mean Singtel’s Cyber Security business is likely to achieve a similar growth trend with much lower sales and marketing costs, in our view. Adjusting for a more reasonable sales and marketing costs (~5-10% of revenue), Dell SecureWorks trends indicate an EBITDA negative to a 10% margin improvement in six quarters.

Dell SecureWorks suggests Trustwave could see an EBITDA margin of 10% by FY19

Source: DBS Bank

We project the Cyber Security segment to increase its EBITDA margins to ~10% versus less than 2% currently by end-FY19, contributing a positive EBITDA of S$54m by FY19 from its annualised EBITDA of S$4m (based on 2Q17 Trustwave EBITDA).

Cyber Security EBITDA on an upward trajectory at Singtel

Source: DBS Bank

Cyber security Contribution to EBITDA in FY19

Source: DBS Bank

ASIAN INSIGHTS VICKERS SECURITIES Page 5

Company Guide

SingTel

Digital advertising

Focus on less competitive data-driven cross channel advertising could be lucrative: We believe Amobee is likely to focus on its ad monitoring and cross platform targeting tools which can be utilized to improve the effectiveness of advertising campaigns. Its Brand Intelligence tool, which analyses billions digital content engagement trends, is already used by major bands such as IKEA and Lexus to shape their marketing strategies. In addition, Amobee INK, Amobee’s cross device audience targeting tool is being used in their media activation strategies. We believe these businesses could potently be more lucrative for Amobee in the medium-long term as these segments face less direct competition form large tech players such as Google and Facebook.

Video advertising to outperform broader digital advertising sector. According to eMarketer, video advertising is expected to be the best performer out of the digital advertising segment in the near term in markets such as the US. Video advertising is expected to grow at a CAGR of ~36% between 2014 and 2020 compared to just 16% growth in the whole digital advertising market. As a result, Amobee’s higher focus on video over display and mobile could potentially benefit Amobee’s growth due to the current growth trends.

Video advertising to outperform display

Source: eMarketer

Fast-growing digital advertising segment should provide a boost for Amobee. Global digital ad spending is expected to grow by 13.5% in 2017 according to MAGNA, IPG Mediabrands' research arm. As a result, we believe Amobee could capture ~10-15% annual growth in the near term. We believe with such growth, the Digital Life segment should achieve positive EBITDA by end-FY19.

Digital life segment to reach positive EBITDA by end-FY19

Source: eMarketer

Verizon is betting big on digital advertising too. Verizon acquired AOL, a digital content producer and advertiser for US$4.4bn (~S$6.3bn) in 2015, establishing itself as a key player in digital advertising and online blogging. AOL owns a range of digital advertising platforms and adtech including “One by AOL”, an automated platform for buying ads across different media, and “Pictela” a high-definition global content marketing platform. Since the consolidation of AOL in 3Q15, the company has contributed over US$2.7bn to Verizon’s top-line, accounting for c. 2% of revenues each quarter. Verizon expects AOL to generate close to US$20bn by 2020 as cited by Bloomberg, which is c. 15% of Verizon’s FY15 revenues.

Digital services to matter even more in the 5G era The Next Generation Mobile Networks (NGMN) Alliance - an association of more than 80 industry players worldwide of which Singtel is a member - aims for 5G to be rolled out commercially by 2020 to meet business and consumer demands. Japan and South Korea’s KT have scheduled plans to launch trial 5G networks by 2017. Hot on their heels would be China Mobile, which intends to roll out a massive-scale network by end-2020. Prohibitively high capex and opex to deploy small-cell base stations Proponents of 5G have advocated small cells, and closely located content servers, as the solution to fulfil the

ASIAN INSIGHTS VICKERS SECURITIES Page 6

Company Guide

SingTel

requirements of high speed and throughput, low latency, full coverage, and high reliability. Small cells are standalone base stations, which are capable of serving a relatively small area and a few users simultaneously. To achieve gigabyte level connectivity for all base stations, the distributed and significantly more numerous content hosting requirements for

low latency, the implementation of 5G will likely result in a stepped increase in capital expenditure and operating costs for telcos.

Lower latency could be the difference between a timely halt and a fatal collision

Source: DBS Bank

High reliability and full coverage over a given area Telco network providers would incur significantly more intensive capex and opex largely due to the need to deploy:

i) thousands of small cells densely located in a given area,

ii) linked up with high bandwidth connections and powered throughout the day, and

iii) the integrated fail-safe mechanisms required to achieve 5G’s higher data transfer speed, greater

fidelity and wider coverage. 

Lower latency by reducing the distance between content and end-users Despite the ongoing advances in equipment and hardware, there remains a delay in signal processing and transfer, as well as, delays related to administrative functions, such as authentication and security. Furthermore, transfer speeds on air and cable cannot be improved further due to physical limitations.

To achieve 5G’s prescribed latency targets, telco network providers need to significantly reduce the distance between the content servers and the end-users’ devices to as low as 1km, according to GSMA. Consequently, content servers would be closer to and possibly integrated with the base stations. Correspondingly, there would be the proliferation of content servers as the ancillary infrastructure to the thousands of small

cell base stations deployed, thus chalking up an ever greater amount of capex.

Bringing content servers closer to end-users across a single network to achieve lower latency

Source: GSMA

ASIAN INSIGHTS VICKERS SECURITIES Page 7

Company Guide

SingTel

Asian telcos’ ROIC projections under various 5G implementation models in 2020

Source: DBS Bank

Seamless connectivity and collaboration between telcos Data transfers between different telco network providers would have to occur at a similarly low latency of 1ms. Unprecedented levels of connectivity between network providers at the base station level would be another crucial piece to realising the 1ms low latency requirement. Compared to the few limited trunk connections present in current networks, having such levels of connectivity would only exacerbate the capex requirements of having individual networks.

Higher spectral frequency to meet high bandwidth requirement 5G aims to achieve data transfer rates of 1Gbps, which is usually associated with fibre and other high-capacity wired connections. However, unlike fibre connections, data throughput in wireless networks are substantially limited by available spectral resources. Competing uses of the available spectrum such as broadcasting, satellite, etc., result in mobile networks occupying only a fraction of that available to isolated fixed line or fibre connections. To achieve increase data transfer speeds, industry participants have therefore considered implementing high-density small-cell networks (leading to more base station level units) and potentially expanding the spectral range beyond 6GHz. However, the higher-frequency bands offer limited cell radiuses and hence rely on a technique known as “beam-forming”. This occurs by focusing radio waves to form a beam for transfer across greater distances, and achieve wider coverage.

Intensive capex for telcos seeking to own 5G network assets Telcos which perpetuate the network ownership model would be presented with two main challenges. Firstly, they would be laden with gargantuan capital outlays – required to enhance current telecommunication infrastructure – estimated to be 2-3x of current levels over the next five years. Their diminished cash flows might also hamper their ability to obtain financing for these capital expenditures at a feasible cost. Secondly, additional expenditure from operating the 5G equipment would cause a drag on their earnings. As a result, these telcos would experience a reduced ROIC of 12%. Sharing 5G networks as an alternative implementation model Comparatively, under the 5G network sharing model, where telcos would collectively contribute towards the 5G infrastructure roll-out, there would be less additional capital outlay and savings on operation costs from industry-wide economies of scale. This would improve the ROIC from 12% by close to 300bps to 15%. Leasing 5G networks from a single network provider the preferred model Under the leasing model, telcos would access 5G networks from a single network provider, and achieve an ROIC of 15%, comparable to that under the 5G network-sharing model. This occurs as the absence of additional capital outlays is mitigated by the lease payments to the single network provider. Under this structure, the single network provider – likely to be a telco equipment provider – would take on the 5G infrastructure assets under favourable financing conditions due to the stability of cash flows generated. The value from the lower costs of financing of the single network provider underpins the difference between the 5G network leasing and sharing models.

ASIAN INSIGHTS VICKERS SECURITIES Page 8

Company Guide

SingTel

Notably, even with the carve-out of 5G infrastructure assets, telcos under the leasing model are capable of achieving comparable earnings as telcos which possess their own 5G networks.

Asset-light telcos under the leasing model to differentiate themselves in digital services

Source: DBS Bank No free lunch: Telcos to lose network differentiation; digital services the new playing field Leasing or sharing the 5G network will lead to the telcos’ loss of network differentiation. However, we believe that this is a fair trade-off as they would transform their business models to differentiate themselves in the domain of digital services. We recommend that telcos under the 5G network sharing and leasing models judiciously manage their 5G-related capex savings by investing in fast-growing and established digital

businesses. This is preferred to small investments scattered across a wide range of digital services, which have yielded less favourable results. We also believe that digital business should be the focus, as it represents approximately 7X the market size

of providing incremental connectivity services. This transformation towards digital businesses as a diversified source of earnings could potentially elevate telcos’ ROIC further.

ASIAN INSIGHTS VICKERS SECURITIES Page 9

Company Guide

SingTel

Loss of network advantages with 5G roll-out prompt differentiation through digital services

Source: DBS Bank

ASIAN INSIGHTS VICKERS SECURITIES Page 10

Company Guide

SingTel

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Singtel the least impacted by the fourth player's entry. Compared to its Singaporean peers, Singtel’s revenues and profitability is significantly diversified. The Singapore mobile segment only contributed to ~13% revenues and <10% operating profits (after associate contributions) in 1H17, according to our estimates. This is in comparison to ~50% and ~70% revenue exposures of StarHub and M1. Furthermore, due to its strong presence in fixed broadband, pay TV and enterprise segments, Singtel’s customer base is likely to remain stickier than its competitors. As a result, we only expect a marginal impact on Singtel’s profitability in the medium term. Optus to see a tough FY18 (21% of Group EBIT). We expect Optus to see a downturn in FY18 due to the full impact of DRP credits and higher depreciation costs related to the elevated capex levels. Though some of this may be mitigated by the recent appreciation of the Australian dollar against Singapore dollar, we believe a negative net impact from Optus is likely for Singtel in FY18. Improvement in associate profits (52% of group EBIT) likely. Telkomsel has continued to perform well with revenue growth in voice and data services. This is likely to stay so in the near term, though XL and Indosat's spectrum sharing could threaten its dominance outside Java in the medium term. Strong growth in mobile data usage in India and Africa will likely drive strong EBITDA growth in the near term for Bharti. However, higher finance costs due to spectrum investments will weigh on Bharti’s overall performance in FY17/18 in our view. In addition, we expect AIS's results to remain relatively weak with costs relating to spectrum sharing agreement with TOT weighing down earnings. However, both Bharti's and AIS's contribution to Singtel's bottom line is likely to see an improvement in FY18 due to the recent increase in effective ownership of AIS and Bharti by Singtel. As a result, we expect associate contributions for Singtel to see 10%/8% growth over FY17/FY18. Digital Life improvement being seen. The Digital Life segment (excluding Cyber Security which is parked under the enterprise segment) is starting to see reduced EBITDA losses. Considering the current top-line growth of the Digital Life segment, we may see the segment becoming EBITDA neutral over the next two-year period.

Singapore Revenue (S$m)

Singapore EBITDA Margin (%)

Optus Revenue (A$m)

Optus EBITDA Margin (%)

Associate pre-tax earnings (S$m)

Source: Company, DBS Bank

73487728 7651 7778 7913

0.0

1141.7

2283.5

3425.2

4567.0

5708.7

6850.5

7992.2

2015A 2016A 2017F 2018F 2019F

29.228.3 28 28 28

0.0

6.0

11.9

17.9

23.8

29.8

2015A 2016A 2017F 2018F 2019F

87909106

8742 8829 9006

0.00

1857.62

3715.25

5572.87

7430.50

9288.12

2015A 2016A 2017F 2018F 2019F

29.9 30.4 30 29.4 29.8

0.0

6.1

12.3

18.4

24.6

30.7

2015A 2016A 2017F 2018F 2019F

26162788

30783333

3567

0.0

720.5

1441.0

2161.5

2881.9

3602.4

2015A 2016A 2017F 2018F 2019F

ASIAN INSIGHTS VICKERS SECURITIES Page 11

Company Guide

SingTel

Balance Sheet:

Strong balance sheet heading into spectrum auction. Singtel is likely to face a payout of S$100-120m at the general spectrum auction expected to happen in FY17/18. Further on, Optus may participate in the 700MHz auction in Australia where spectrum assets would cost A$250m+. This is addition to the relatively high levels of capex the company expects to maintain in Singapore and Australia in FY18. However, we believe Singtel has sufficient financial capacity at present to capture the required spectrum assets and continue network investments due to its strong cash generation and relatively low debt levels. Share Price Drivers:

Associate profits to support profitability in FY18. We expect FY17 profitability to remain stable compared to FY16 with increased profitability of Telkomsel offsetting decreases in Optus. With the increase of Bharti and AIS ownership and Telkomsel's strong performance, we believe FY18 associate profitability is likely to increase ~8%. This will offset lower Optus performance due to the full effect of DRP credits and higher depreciation. Our SOTP valuation indicates a share price of S$4.46 for Singtel, with S$1.77coming from its core businesses, S$2.59 from its regional investments and S$0.10 from its digital businesses. Key Risks:

Digital advertising business may continue to have stable or higher EBITDA losses. Our projection of digital advertising EBITDA losses to reduce from S$150-180m in FY17F to S$20-30m in FY19F may be too optimistic due to intense competition. Currency risk a concern. Singapore only contributes about 30% of overall earnings for Singtel. As a result, strengthening of the Singapore dollar could have a dilutive effect on the bulk of Singtel’s earnings. Tougher competitive landscape in Australia. Higher-than-expected completion in Australia due to increasing presence of MVNOs and a more aggressive Telstra could result in Singtel underperforming our expectations. Company Background

Singtel is the largest telecom operator in Singapore and its Australian subsidiary Optus is the second largest operator in Australia. Besides, SingTel has substantial stakes in telcos in the region - Telkomsel in Indonesia, Bharti in India, AIS in Thailand and Globe in Philippines.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)

Source: Company, DBS Bank

0.3

0.3

0.3

0.4

0.4

0.4

0.4

0.4

0.5

0.5

0.5

0.00

0.10

0.20

0.30

0.40

0.50

2015A 2016A 2017F 2018F 2019F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

2015A 2016A 2017F 2018A 2019F

Capital Expenditure (-)

S$m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2015A 2016A 2017F 2018F 2019F

Avg: 16.1x

+1sd: 17.1x

+2sd: 18x

‐1sd: 15.2x

‐2sd: 14.3x

12.7

13.7

14.7

15.7

16.7

17.7

18.7

19.7

20.7

Jan-13 Jan-14 Jan-15 Jan-16

(x)

Avg: 2.48x

+1sd: 2.63x

+2sd: 2.77x

‐1sd: 2.34x

‐2sd: 2.2x

1.9

2.1

2.3

2.5

2.7

2.9

3.1

3.3

Jan-13 Jan-14 Jan-15 Jan-16

(x)

ASIAN INSIGHTS VICKERS SECURITIES Page 12

Company Guide

SingTel

Key Assumptions

FY Mar 2015A 2016A 2017F 2018F 2019F Singapore Revenue (S$m) 7,348 7,728 7,651 7,778 7,913 Singapore EBITDA Margin 29.2 28.3 28.0 28.0 28.0 Optus Revenue (A$m) 8,790 9,106 8,742 8,829 9,006 Optus EBITDA Margin (%) 29.9 30.4 30.0 29.4 29.8 Associate pre-tax earnings 2,616 2,788 3,078 3,333 3,567

Income Statement (S$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Revenue 17,223 16,961 16,611 16,828 17,144 Cost of Goods Sold (12,284) (12,097) (11,785) (11,993) (12,181) Gross Profit 4,939 4,864 4,826 4,835 4,963 Other Opng (Exp)/Inc (2,010) (2,001) (2,103) (2,137) (2,163) Operating Profit 2,929 2,864 2,723 2,697 2,800 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 2,616 2,788 3,078 3,333 3,567 Net Interest (Exp)/Inc (216) (265) (309) (332) (366) Exceptional Gain/(Loss) (54.3) 56.9 0.0 0.0 0.0 Pre-tax Profit 5,275 5,444 5,492 5,698 6,001 Tax (1,490) (1,586) (1,600) (1,660) (1,748) Minority Interest (3.0) 12.5 5.00 5.00 5.00 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 3,782 3,871 3,898 4,044 4,258 Net Profit before Except. 3,836 3,814 3,898 4,044 4,258 EBITDA 7,707 7,801 8,059 8,331 8,702 Growth Revenue Gth (%) 2.2 (1.5) (2.1) 1.3 1.9 EBITDA Gth (%) 4.8 1.2 3.3 3.4 4.4 Opg Profit Gth (%) (3.1) (2.2) (4.9) (0.9) 3.8 Net Profit Gth (Pre-ex) (%) 5.8 (0.6) 2.2 3.7 5.3 Margins & Ratio Gross Margins (%) 28.7 28.7 29.1 28.7 28.9 Opg Profit Margin (%) 17.0 16.9 16.4 16.0 16.3 Net Profit Margin (%) 22.0 22.8 23.5 24.0 24.8 ROAE (%) 15.6 15.6 15.3 15.2 15.3 ROA (%) 9.3 9.0 8.7 8.6 8.6 ROCE (%) 5.9 5.5 5.0 4.8 4.7 Div Payout Ratio (%) 73.7 72.1 75.0 75.0 75.0 Net Interest Cover (x) 13.5 10.8 8.8 8.1 7.7

Source: Company, DBS Bank

Associate profitability seeing improvement

Improvement expected post-FY18

ASIAN INSIGHTS VICKERS SECURITIES Page 13

Company Guide

SingTel

Quarterly / Interim Income Statement (S$m)

FY Mar 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 Revenue 4,184 4,474 4,094 3,908 4,086 Cost of Goods Sold (2,934) (3,290) (2,865) (2,732) (2,901) Gross Profit 1,250 1,184 1,229 1,176 1,186 Other Oper. (Exp)/Inc (492) (501) (513) (483) (502) Operating Profit 758 683 717 692 684 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 706 698 740 767 737 Net Interest (Exp)/Inc (53.0) (63.0) (91.2) (65.1) (71.2) Exceptional Gain/(Loss) 55.0 1.00 (34.7) (19.0) (6.3) Pre-tax Profit 1,466 1,319 1,331 1,375 1,344 Tax (440) (368) (391) (435) (376) Minority Interest 3.00 4.00 6.00 3.80 4.20 Net Profit 1,029 955 946 944 972 Net profit bef Except. 974 954 981 963 979 EBITDA 1,464 1,381 1,457 1,460 1,421 Growth Revenue Gth (%) (0.6) 6.9 (8.5) (4.5) 4.6 EBITDA Gth (%) 6.8 (5.7) 5.5 0.2 (2.6) Opg Profit Gth (%) 7.4 (9.9) 4.9 (3.4) (1.2) Net Profit Gth (Pre-ex) (%) 8.8 (2.1) 2.8 (1.8) 1.6 Margins Gross Margins (%) 29.9 26.5 30.0 30.1 29.0 Opg Profit Margins (%) 18.1 15.3 17.5 17.7 16.7 Net Profit Margins (%) 24.6 21.3 23.1 24.2 23.8

Balance Sheet (S$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 10,683 11,154 11,201 11,194 11,042 Invts in Associates & JVs 10,846 11,086 13,846 16,170 18,938 Other LT Assets 15,770 16,160 15,860 15,561 15,261 Cash & ST Invts 563 462 295 453 444 Inventory 290 320 313 317 323 Debtors 3,885 4,366 4,276 4,332 4,413 Other Current Assets 29.8 17.5 17.5 17.5 17.5 Total Assets 42,067 43,566 45,810 48,044 50,438 ST Debt 174 686 686 686 686 Creditor 4,464 4,597 4,502 4,561 4,647 Other Current Liab 1,118 1,257 2,492 2,552 2,640 LT Debt 8,804 9,255 9,255 10,255 11,255 Other LT Liabilities 2,738 2,768 2,768 2,768 2,768 Shareholder’s Equity 24,733 24,967 26,075 27,196 28,421 Minority Interests 34.6 35.7 30.7 25.7 20.7 Total Cap. & Liab. 42,067 43,566 45,810 48,044 50,438 Non-Cash Wkg. Capital (1,378) (1,151) (2,388) (2,447) (2,533) Net Cash/(Debt) (8,416) (9,479) (9,646) (10,488) (11,497) Debtors Turn (avg days) 78.8 88.8 95.0 93.4 93.1 Creditors Turn (avg days) 149.0 166.2 174.3 170.6 170.7 Inventory Turn (avg days) 8.3 11.2 12.1 11.9 11.9 Asset Turnover (x) 0.4 0.4 0.4 0.4 0.3 Current Ratio (x) 0.8 0.8 0.6 0.7 0.7 Quick Ratio (x) 0.8 0.7 0.6 0.6 0.6 Net Debt/Equity (X) 0.3 0.4 0.4 0.4 0.4 Net Debt/Equity ex MI (X) 0.3 0.4 0.4 0.4 0.4 Capex to Debt (%) 40.5 31.8 20.2 18.2 15.8 Z-Score (X) 3.7 3.5 3.5 3.5 3.5

Source: Company, DBS Bank

Profitability hit by DRP credits and lower termination rates in Australia

Low level of leverage leaves headroom for spectrum acquisition

ASIAN INSIGHTS VICKERS SECURITIES Page 14

Company Guide

SingTel

Cash Flow Statement (S$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 5,275 5,444 5,492 5,698 6,001 Dep. & Amort. 2,161 2,149 2,259 2,301 2,335 Tax Paid (598) (658) (364) (1,600) (1,660) Assoc. & JV Inc/(loss) (2,616) (2,788) (3,078) (3,333) (3,567) Chg in Wkg.Cap. 69.3 (1,031) 1.84 (1.1) (1.7) Other Operating CF 280 182 378 397 435 Net Operating CF 4,571 3,297 4,688 3,462 3,543 Capital Exp.(net) (3,638) (3,157) (2,006) (1,993) (1,883) Other Invts.(net) 51.9 42.7 0.0 0.0 0.0 Invts in Assoc. & JV 4.60 (200) (860) 0.0 0.0 Div from Assoc & JV 1,215 1,351 1,178 1,010 799 Other Investing CF 24.2 574 0.0 0.0 0.0 Net Investing CF (2,342) (1,389) (1,688) (984) (1,084) Div Paid (2,683) (2,794) (2,789) (2,923) (3,033) Chg in Gross Debt 737 1,129 0.0 1,000 1,000 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (365) (378) (378) (397) (435) Net Financing CF (2,311) (2,044) (3,167) (2,320) (2,468) Currency Adjustments 21.2 34.8 0.0 0.0 0.0 Chg in Cash (59.7) (101) (167) 158 (9.4) Opg CFPS (S cts) 28.3 27.2 28.7 21.2 21.7 Free CFPS (S cts) 5.86 0.88 16.4 9.00 10.2

Source: Company, DBS Bank

Dividend payment to increase

ASIAN INSIGHTS VICKERS SECURITIES Page 15

Company Guide

SingTel

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends Completed Date: 23 Jan 2017 08:28:26 (SGT) Dissemination Date: 23 Jan 2017 09:34:47 (SGT)

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd,

its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated

in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS

Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,

the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to

change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard

to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of

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or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of

profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This

document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or

persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have

positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and

other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and

assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on

which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual

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Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

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DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research

department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction

in the past twelve months and does not engage in market-making.

ASIAN INSIGHTS VICKERS SECURITIES Page 16

Company Guide

SingTel

ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. As of 23 Jan 2017, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in

SingTel recommended in this report as of 30 Dec 2016.

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

Compensation for investment banking services:

3. DBS Bank Ltd, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for

investment banking services from SingTel as of 30 Dec 2016.

4. DBS Bank Ltd, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for

SingTel in the past 12 months, as of 30 Dec 2016.

5. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a

manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further

information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document

should contact DBSVUSA exclusively.

Disclosure of previous investment recommendation produced:

6. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other

investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12

months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by

DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

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ASIAN INSIGHTS VICKERS SECURITIES Page 17

Company Guide

SingTel

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