SingTel - RHB Invest 2016-08-19: Expanding Its Economic Interests

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SINGTEL Z74.SI

SingTel - Expanding Its Economic Interests

• We are slightly positive on Singtel’s latest three pronged deal to acquire Intouch and Bharti from Temasek. The transaction: 
  1. Raises the economic interests in two key associates; 
  2. Does not impinge on takeover rules; and 
  3. Is marginally EPS accretive, based on our estimates.
• Our TP adjusts to SGD4.11 (from SGD4.00, 2% downside) after incorporating the higher effective stakes for AIS and Bharti in our SOP valuation. 
• Reiterate NEUTRAL. Share price will nonetheless be supported by the placement to Temasek at SGD4.16.

Acquiring 21% of Intouch and 7% of Bharti from Temasek for SGD2.5bn.

• Singtel had planned to raise its effective stake in AIS (ADVANC TB, BUY, TP: THB205) in 2014 but was possibly caught in a bind due to the political fallout in the country then. 
• We believe the deal is timely with political risks in Thailand having receded (recent referendum confirming the Junta’s popularity) alongside Temasek’s desire to monetise/streamline some of its investments. The three-pronged contemporaneous deal is expected to close by 1Q17.

Two-thirds equity funding-acquisition is marginally dilutive to earnings.

• Singtel will fund 65% of the purchase consideration via a share placement (385m shares) to Temasek at SGD4.16 (raising SGD1.6bn) and the remainder via a combination of short-term debt and internal cash. 
• Valuations of the assets are fair, in our view, at 15.4x FY17F EPS for AIS and implied 10.8x FY17F EPS for Bharti. 
• Temasek’s stake in Singtel will rise to 52.3%, from 51.1% post the share placement. 
• Adjusting for debt, the enlarged share base, higher associate contributions and deal completion in 1Q17, we estimate marginal FY17 EPS accretion of 1.8% and 2.2% for FY18, all else being equal.

No ‘look through’ – not triggering any takeover offer. 

• Management has confirmed that the acquisition of Intouch (INTUC TB, NR) does not encroach on takeover guidelines, despite Singtel having a direct 23.3% stake in AIS. We understand Thai takeover rules do not observe the ‘look through’ policy, hence deemed interests are not defined as part of the 25% trigger for a general offer.
• Post-acquisition, Singtel’s effective stake/economic interest in AIS/Bharti rises to 31.8%/36.3% from 23.3%/32.9%. 

Credit rating taken into account, financial flexibility maintained.

• Reaffirming that the deal does not compromise its dividend payout guidance (60-75% of core earnings), Singtel said funding options have factored in: 
  1. The group’s credit rating; 
  2. The need to maintain a certain level of financial flexibility; and 
  3. Capital management opportunities.
• We estimate Singtel’s net gearing would rise slightly to 0.32, from 0.31 in 1QFY17 (Mar) post acquisition while net debt/EBITDA increases to 1.1x (from 1.0x in 1QFY17). 
• Management continues to evaluate opportunities to raise its stake in other associates, including the option for majoirty control.

Singapore Research Team RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-19

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 4.11 Up 4.000