Singapore Telecommunications - UOB Kay Hian 2016-08-19: Raises Stake In InTouch Holdings And Bharti Telecom

SINGTEL Z74.SI

Singapore Telecommunications (ST SP) - Raises Stake In InTouch Holdings And Bharti Telecom

The proposed acquisitions of 21% of InTouch Holdings and 7.4% of Bharti Telecom allow Singtel to entrench its positioning in the high-growth emerging markets of Thailand and India.
The deal has a neutral impact on EPS but increases its NTA/share by 10.6%.

Singtel has proposed to acquire from parent Temasek Holdings a 21% stake in InTouch Holdings and a 7.4% stake in Bharti Telecom for S$2,470m. The acquisition values InTouch shares at Bt60.83 (20-day VWAP) and Bharti Telecom at Rs235.62 (10% discount to 20-day VWAP as it is not listed).
InTouch owns 40.5% of Advanced Info Service (AIS), 41.1% of Thaicom and other smaller businesses in Thailand, such as ITAS, MB, ITV and InTouch Media. Bharti Telecom is a holding company for a 45.1% stake in Bharti Airtel.

The deal would be funded by the proceeds of S$1,605m from the placement of 386m new Singtel shares to Temasek at S$4.16 each, and the balance from internal cash and short-term debt.
The three legs of the transactions - the acquisition of InTouch, the acquisition of Bharti Telecom, and the issue of new shares to Temasek - are inter-conditional upon each other. The whole deal would be aborted if any leg of the deal fails to go through.
The acquisition is subject to approvals from Singtel's minority shareholders during an EGM by end-October, and from regulators in Singapore, Thailand and India. Completion of the transaction is expected by end December.

The proposed transactions are in line with Singtel's intention to increase its stakes in its regional mobile associates. Thailand and India are high-growth emerging markets. AIS is the largest mobile operator in Thailand with 39m mobile subscribers and a market share of 46%.
Bharti Airtel is the largest mobile operator in India with 256m mobile subscribers and a market share of 25%.
We are pleasantly surprised that the price tags for InTouch Holdings and Bharti Telecom are lower than their prevalent market prices.

The acquisition, if completed, will increase Singtel's effective stake in AIS from 23.3% to 31.8%. The 25% threshold for takeover is based on direct stake. Singtel is buying into InTouch and its direct stake in AIS remains unchanged at 23.3%. Thus, the acquisition does not trigger a general offer for AIS.
Singtel’s effective stake in Bharti Airtel will increase from 32% to 36.2%. Temasek’s stake in Singtel would increase from 51.1% to 52.3%.

Management estimates the transactions will increase Singtel’s NTA/share by 10.6% to S$0.84 and increase FY16 EPS by 0.4% to 24.4 cents. Singtel has not provided specific guidance on the impact on gearing. We estimate Singtel’s net debt/equity would be relatively unchanged at 0.32x.

The transactions are not expected to affect Singtel’s dividend policy, which remains unchanged at 60-75% of underlying net profit.

We maintain our earnings forecasts pending approval and completion of the proposed transaction.

We did a scenario analysis based on two possible outcomes:
1. best case - no new telco entrant, and
2. worst case - a fourth mobile operator disrupts the status quo.
We attribute a probability of 25% for the best case and 75% for the worst case.
Our probability-weighted target price is S$4.70 (best case: S$5.02, worst case: S$4.61).
The risk-reward trade-off is favourable with potential upside of 9.8% to 19.5%.

Singtel is the least affected by a fourth mobile operator in Singapore as its overseas businesses account for about 70% of its bottom-line.
Singtel will benefit from growth at its regional mobile associates, such as Telkomsel in Indonesia, Bharti Airtel in India, Advanced Info Service in Thailand and Globe Telecom in the Philippines.
Singtel is the largest and most liquid defensive stock listed on the Singapore Exchange and deserves to trade at a premium.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-19

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