Singapore Telecommunications - Maybank Kim Eng 2016-08-18: A+ long-term, B- short-term

Singapore Telecommunications (ST SP) - Maybank Kim Eng 2016-08-18: A+ long-term, B- short-term SINGTEL Z74.SI

Singapore Telecommunications (ST SP) - A+ long-term, B- short-term

    AIS/Airtel deals: 2 A’s don’t mean a pass; D/G to HOLD 

    • D/G Singtel to HOLD from BUY. It is now fairly valued against our revised TP following its 15% rise YTD. 
    • TP lowered 6% to SGD4.41 as we change valuation method from SOTP to DCF (WACC 7.2, LTG 2.5%). 
    • With the proposed SGD2.47b acquisitions of Intouch and Bharti Telecom, investors will zoom in on cashflow. 
    • We see the acquisitions as short-term negative as sharply-lower FCF is now expected this year, which could see DPS reduced while still keeping a 60-75% dividend payout. But it’s long-term positive as such opportunities do not come often.

    1. Buys Intouch & Bharti stakes from Temasek 

    1.1 Singtel to raise effective stakes in AIS/Bharti 

    • Singtel has announced a conditional agreement to buy 21% of Intouch Holdings (INTUCH TB, BUY, TP THB66) and 7.39% of Bharti Telecom (BTL) from Temasek Holdings for SGD2.47b. 
    • Intouch owns 40.5% of Thailand’s biggest mobile telco, Advanced Info Systems (ADVANC TB, BUY, TP THB197.55), while BTL is the 44% holding company of Bharti Airtel (BHARTI IN, HOLD, TP INR365).

    1.2 Deal highlights

    • 65% of deal value (or SGD1.6b) funded through shares. Singtel will issue 385.6m new shares to Temasek’s wholly-owned subsidiary Tembusu Capital at SGD4.16 (1% off 20-day VWAP).
    • Rest (35% or SGD865m) through cash or short-term debt. Assuming all-debt for this portion, this will bump Singtel’s net debt/EBITDA up from 1x to about 1.15x.
    • Post-deal, Temasek’s stake in Singtel will rise from 51.1% to 52.3%. Temasek to pay 1-10% discounts. The price for each Intouch and BTL share that Singtel will be paying is THB60.83 (1% off 20-day VWAP) and INR235.62. The see-through price for Airtel is INR323.44, or 10% off its 20-day VWAP to account for BTL’s private status.
    • Needs to clear shareholder/regulatory hurdles. Minority shareholders’ approval, in simple majority, will be needed, as well as the relevant regulators.
    • Targeting year-end to complete. According to management, the AGM should be held by end-Oct and the deal completed by Dec 2016.
    • Package deal. The two acquisitions and the share placement cannot be unbundled. They must be completed together or not at all.

    1.3 Briefing Q&A

    • Takeover risks and foreign shareholdings. There is no change of foreign shareholdings within either Intouch, AIS or Airtel as the sale of shares by Temasek to Singtel is basically the sale by one foreign shareholder to another foreign shareholder. In addition, management indicated it has studied the relevant takeover laws in Thailand and believes there is unlikely to be any risk of the need to make a tender offer for AIS, as the change in ownership will be happening indirectly at the Intouch level.
    • Deal motivation, deal structure and market risks. Singtel emphasized that the deal was on a willing buyer, willing seller basis. It was happy to be given the opportunity to increase its economic exposure in Thailand and India, with each transaction justified on its own merits. The two deals were negotiated on a package basis. In other words, Temasek wanted to only sell 21% of Intouch, hence Singtel was only able to buy 21%. In any case, Singtel has always indicated it is always ready to consider buying more equity under the right terms and conditions. While there are risks associated with each market, Singtel is in them for the long haul.
    • Impact on EPS, dividend policy. According to the announcement, the proforma financial lift to FY16’s consolidated earnings is minimal at SGD108m or SGD0.01 a share, after taking into account the additional interest cost from debt financing. In addition, Singtel confirmed that the deals are not expected to affect its dividend policy of 60-75% of underlying net profit.
    • Impact on capital structure, investment ratings. Management emphasized that each transaction will be justified on its individual merits combined with the impact on capital structure and sustainability of dividends. There was no specific guidance on the optimum capital structure, merely that Singtel will maintain a good investment-grade credit rating.

    2. Our thoughts 

    2.1 What we like about the acquisitions:

    • Temasek is paying SGD4.16 a share or only a 1% discount to VWAP for the new Singtel shares. As Singtel’s share price has risen 15% this year, this is quite a good price. Our fair value for Singtel prior to the release of the recent 1Q FY17 results was SGD4.50. At the very least, it was not done at the trough. This allowed Singtel to use its shares to its full effect in this transaction.
    • Temasek is also valuing the two listed associates at a significant discount of 9% for AIS and 10% for Airtel. We estimate the see-through value for AIS at THB162 and Airtel at INR323, relative to our analysts’ fair values of THB197 (a discount of 18%) and INR365 (a discount of 11%) respectively. Intouch itself is being valued at THB60.83, close to MBKE fair value of THB66.
    • Singtel has always said it would like to raise stakes in its regional associates when the opportunities arose and at the right price. Its actions are not inconsistent with its core message. When you think about it, Temasek is the only possible source of substantial blocks of shares in AIS and Airtel given its ownership of Intouch and Bharti Telecom.
    • Singtel has also said that it will evaluate each acquisition on its own merits, and that it will assess each transaction on its individual merits with an eye on capital structure and sustainability of dividends.

    2.2 What we don’t like about the acquisitions:

    • The timing of the acquisitions is not the most desirable. AIS, for instance, faces a huge spectrum bill over the next few years which could lead to a cut in dividend. Our Thai Head of Research Maria Lapiz expects them to have to cough up at least THB8b a year from now until the big bullet of THB60b in 2020. As a result, she expects them to cut the dividend payout from c.99% in the past to c.65% in FY17 and FY18.
    • Bharti Airtel is also not in the best of positions. Our Indian telco analyst Neerav Dalal expects voice and data yields to continue to erode in the face of a potential return of ruinous price wars, especially as a new competitor Reliance Jio is expected to enter the market in 2H16. Both Airtel, Vodafone and Idea Cellular recently slashed data prices and added value to their voice plans following Jio’s pre-startup offer of free voice and data plans.

    2.3 Minimal boost to EPS, but bigger risks to FCF and DPS 

    • The boost to EPS is minimal, while cashflow impact is likely to be more negative, and DPS risks being cut. We estimate a 0.6-0.8% boost to EPS in FY17/18 following 3.1/3.2% higher NPAT forecasts due to shares dilution.
    • FCF is expected to be significantly hit in FY16 upon payment for the two transactions in 4QFY17 assuming deal completion in Dec 2016.
    • By our estimates, Singtel may need to trim FY17E dividend payout slightly from 75% to 70% to keep net debt/EBITDA below 1.2x. This will still be in keeping with its dividend policy, which is based on a range of 60-75% of underlying profits.

    3. Valuations & recommendation 

    3.1 Change to DCF-TP of SGD4.41, D/G to HOLD 

    • We change our valuation methodology from SOTP to DCF, which we think will be more appropriate with the increased emphasis on cashflows following these transactions in future. It also harmonises our valuation methodology across the Singapore telco space, as our valuations for M1 and StarHub are already based on DCF.
    • With just 4% upside to our DCF-based TP of SGD4.41, we downgrade Singtel from BUY to HOLD. Our previous SOTP-TP was SGD4.62 (corrected for a change in TP for Airtel).

    Swing Factors


    • No new competitor to take up a new mobile operator licence. The three incumbents keep their spectrum allocations, including bands reserved for fourth telco.
    • AUD reverses its weakening trend against SGD. Every 1% gain in AUD translates to 0.5% gain in Optus revenue, as Optus accounts for c.55% of group revenue.


    • May not be able to maintain > 70% dividend payouts if it needs to reserve cash to pay for spectrum, network or other investments, especially if associate dividends start to flag.

    Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-08-18
    Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade BUY 4.41 Down 4.690