Singapore Telecommunications (ST SP) - UOB Kay Hian 2017-10-16: Bharti Airtel Adding 44m Mobile Subscribers For Free

SINGTEL Z74.SI

Singapore Telecommunications (ST SP) - Bharti Airtel Adding 44m Mobile Subscribers For Free

Positive surprise from Bharti Airtel due to its merger with Tata Teleservices’ CMB, which was previously thought to have fallen through.
Bharti Airtel gains 44m mobile subscribers and 178.5MHz of additional spectrum in the 850MHz, 1800MHz and 2100MHz frequency bands across 19 circles by paying only Rs20b to the DoT for unpaid spectrum liabilities.

Bharti Airtel has closed the gap with revenue market share increasing from 35% to 40%, vs 42% for Vodafone-Idea.
Maintain BUY and target price of S$4.53.

Bharti Airtel has agreed to merge with Tata Teleservices’ consumer mobile business (CMB). Key terms of the deal include:
1. Tata Teleservices’ 44m consumer mobile subscribers will add to Bharti Airtel’s subscriber base of 307m, bringing Bharti Airtel’s total mobile subscribers to 351m.
2. The merger is conducted on a debt-free and cash-free basis. Tata Teleservices would settle all past liabilities and dues. Bharti Airtel will pay only a small portion of Tata Teleservices’ total unpaid spectrum liabilities of Rs100b (undisclosed but reported at about Rs20b) to the Department of Telecommunications (DoT).
3. Bharti Airtel would gain 178.5MHz of additional spectrum in the 850MHz, 1800MHz and 2100MHz frequency bands across 19 circles.
4. Bharti Airtel gains the indefeasible rights to use (IRU) Tata’s fibre backhaul network.

Bharti Airtel would absorb Tata Teleservices’ CMB across 19 circles, representing the bulk of India’s population base. The merger enables Bharti Airtel to close the gap with Vodafone-Idea, which has 391m subscribers. Tata Teleservices has revenue market share of 5%. With Tata Teleservices’ CMB, Bharti Airtel’s revenue market share would increase from 35% to 40% (Vodafone-Idea: 42%).

Bharti and Tata started negotiations a few months ago. However, negotiations were heading nowhere and collapsed by end-September. Tata met DoT on 6 Oct 17 to inform the government of its intention to shut down its telecommunications business. In a dramatic turn of events, the merger was stitched up over just five days after Bharti’s chairman Sunil Mittal and Tata’s chairman Natarajan Chandrasekaran met in a last ditch attempt to revive the deal.
The merger allows Tata to offload a loss-making business, which management felt would be impossible to recover. The business has struggled under the burden of enormous debts and incurred cash losses on a monthly basis.

Bharti and Tata will work together to explore other mutual areas of cooperation. The two companies are believed to be studying a deeper alliance by consolidating their direct-to-home (DTH) TV and broadband businesses. There may be further collaboration with Tata Teleservices’ enterprise and fixed line business, which is profitable.
Tata Teleservices retains its 26% stake in Viom Networks, a tower company.

Vodafone India and Idea Cellular have merged, creating a behemoth with 391m subscribers (combined revenue market share: 42%). Bharti Airtel has agreed to acquire Telenor India, thus gaining valuable spectrum for the 1800MHz frequency band in six Indian states. It also completed the acquisition of Tikona Digital Networks in Aug 17. Many small operators would eventually be taken over, consolidating the industry from 11 to just six players.
The merger between Bharti Airtel and Tata Teleservices CMB will put further pressure for industry consolidation as smaller players would be disadvantaged due to lack of scale.

Singtel has received S$1,095.3m cash after its divested its 75.01% stake in NetLink NBN Trust. Shareholder loan of S$1,100m has also been repaid. Singtel's book cost for 100% of NetLink is only S$265m. Singtel would recognise divestment gains of S$1,895m, including the release of unamortised deferred gains, in 2QFY18.
Management intends to utilise the total proceeds of S$2,195.3m to invest in its core businesses, new business opportunities, pay down debt and capital management initiatives. The special dividend related to NetLink NBN Trust’s IPO could be up to a maximum of 13.8 S cents. The board would deliberate on the potential special dividend together with the interim dividend when Singtel releases its 2QFY18 results in mid-November.
We have factored in a special dividend of 9 S cents/share from the divestment of NetLink NBN Trust, which represents 65% of the total proceeds.

We maintain our earnings forecasts because we have already factored in a 60% growth in earnings contribution from Bharti Airtel in FY19 driven by the massive industry consolidation.

Our target price is S$4.53, based on DCF (required rate of return: 6.1%, growth: 1.5%).

SingTel is the least affected by a fourth mobile operator in Singapore as its overseas businesses account for about 70% of 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/ 2017-10-16

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.530 Same 4.530