SingTel - DBS Research 2020-01-14: Favorable Risk-reward; 21% Reward Vs 2% Risk

SINGTEL (SGX:Z74) | SGinvestors.io SINGTEL (SGX:Z74)

SingTel - Favorable Risk-reward; 21% Reward Vs 2% Risk

  • Singapore business prospects to improve with exit of mobile virtual network players and award of 5G licences in mid-2020.
  • Estimated net worth of non-core, digital and data centre assets which can be divested, if needed, is ~34Scts per share (over 10% of SingTel’s market cap).
  • Maintain BUY with higher target price as we value its core business in line with the regional average.

Singtel offers 17% upside potential with over 5% yield.

  • On the back of 15-50% tariff hikes in India, we project 49% growth in associates’ pre-tax profit contribution in FY21F, which has been a critical factor in SingTel (SGX:Z74)’s stock performance historically.
  • Secondly, mobile virtual network operators (MVNOs) are struggling in Singapore and the award of 5G licences in mid-2020 could hasten the exit of challengers like TPG, benefiting SingTel.
  • Thirdly, SingTel’s non-core, digital and data-centre businesses, are potential candidates for divestment over the next 12-18 months, and will lend support to 17.5Scts dividend per share (5.3% yield). SingTel’s 24% holding company discount (vs. 14% historic average) is attractive.
  • See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.

India saw 15-50% hike in mobile tariff versus market expectations of 15-20%.

  • On 2 December, all three leading telecommunications companies (telcos) in India announced tariff hikes in the range of 15-50% for pre-paid subscribers, effective from the first week of December. In addition, Vodafone Idea has restricted free off-net voice usage in all its pre-paid plans. Bharti is likely to see a significant 28% rise in average revenue per user (ARPU) in FY21F according to our Indian research partner Emkay Global.

Singapore market may improve as new players could exit.

  • In our view, StarHub (SGX:CC3) & M1 may bid jointly for a nationwide 5G licence in February 2020 and SingTel might go solo. We expect 5G licences to be awarded in mid-2020. Without a nationwide 5G licence, new entrant TPG’s network would not be future proof as there will be 5G coverage across at least half of Singapore by the end of 2022.
  • Separately, we project annual revenue of S$36m at best (~1% revenue share) for TPG even after 12 months of its commercial launch in mid-2020, leading to huge losses. We can’t identify a reason for TPG to stay in a loss-making business with bleaker prospects in a 5G world. The discontinuation of operations by MVNO Zero Mobile in December 2019 also shows that new players are struggling, and some of them may look to exit Singapore soon.
  • Based on our understanding, 5G capital expenditure (capex) is 2-3x that of 4G capex for similar coverage. Telcos must share their 5G networks to justify the high 5G capex. While most countries in the region achieved ~50% 4G coverage in 2-3 years and ~80% coverage in 5-6 years, 5G network deployment is expected to take significantly longer. In the Southeast Asian (SEA) region, Singapore will be the first to deploy 5G connectivity, while Malaysia and Thailand are likely to start rolling out 5G networks in 2021.

Singapore will be the first in the region to deploy 5G connectivity.

  • The Info-communications Media Development Authority (IMDA) revised its previous proposal to allocate only two 5G licences, revealing plans to make up to four 5G licences available in Singapore. Accordingly, there will be two nationwide 5G networks in line with IMDA’s original plan along with two smaller 5G networks primarily targeting specific use cases.
  • The two nationwide licences would entail spectrum in the 3.5GHz band along with spectrum in the 26GHz and 28GHz bands while the two smaller networks would only be allocated spectrum in the millimeter wave (similar allocation to the nationwide 5G networks would be provided to the smaller 5G networks within the millimeter spectrum bands).
  • Interested operators are required to provide their 5G proposals including their network design and rollout plans to the IMDA by February 2020. Licences are expected to be granted by mid-2020 although the 3.5GHz licences required for the launch of the nationwide networks are likely to be allocated only in 2021.

5G spectrum is very cheap in Singapore.

  • The 3.5 Ghz band will cost just ~S$55m as base price + S$154k for 15 years as an annual fee. The 4G spectrum auction in 2017, in which all four telcos participated, netted the government S$1.14bn.
  • Only the higher 5G bands have an annual fee of S$1.23m for 15 years.

5G network sharing in Singapore.

  • The launch of 5G in 2020 in Singapore could be a potential catalyst for a network sharing deal with another telecom operator for StarHub. With only two nationwide 5G network licences up for grabs, we believe that StarHub, as the second biggest operator in terms of subscribers, is likely to be a contender for one of the two licences, most likely via a tie-up with M1 to share the capex of the 5G network roll-out. SingTel is expected to go solo with its bid as S$.01-1.5bn 5G capex over 7-8 years should not be an issue for a big company like SingTel.

Gradual 5G rollout in Singapore.

  • Despite the 5G rollout starting from 2020 onwards, IMDA states that only ~50% coverage will be possible by 2023 as the key 5G spectrum 3.5GHz, will be available for use only by 2021.The 5G rollout is much more gradual compared with 4G. 4G network coverage requirement for TPG was nationwide outdoor coverage (not 50%) in just 12 months of spectrum rights commencement. The slower rollout can be explained by a lack of decent revenue opportunity in the consumer space despite high 5G capex requirements.

Non-core and digital businesses could be divested by Singtel in case there is a need to sustain 17.5Scts dividend per share.

  • SingTel’s net debt-to-adjusted EBITDA as per our estimates would remain above 2x (accounting for operating leases as debt based on the Singapore Financial Reporting Standard (SFRS 16), which is the top end of SingTel’s optimal gearing level of 1.5x-2.0x. We expect SingTel to divest some of its non-core business and digital business to bring it below 2x.

Non-core business is worth S$1.4bn or 8.5Scts per share.

We value ST’s digital businesses, comprising Cyber-Security and Digital Life at S$2.4bn or S$0.14 per share.

  • The Cyber-Security segment is valued at S$818m, based on enterprise value/revenue (EV/revenue) of 1.3x, pegged to a 20% discount to peer average to account for the lack of profitability of SingTel’s cyber-security operations. The Digital Life segment, which largely comprises the Ad-Tech firm Amobee group, has been valued at an EV/Revenue of 1.05x, at a 30% discount to the average valuations of recent acquisitions in the Ad-Tech space

We value SingTel’s data centre business at S$2.0bn or S$0.12 per share.

  • Pure-play data centre (DC) operators fetch an average EV/EBITDA valuation of ~20x while telcos fetch a valuation of ~7x, suggesting 60-70% undervaluation of DC assets held by telcos. Pure-play DC operators tend to structure their business in the form of real estate investment trusts (REITs), yielding tax efficiencies and higher distributions for its owners. This creates a natural premium due to higher cash flow transparency boosting the market value. As evident from US telcos Verizon and Century Link divesting their data-centre businesses, telcos are better off divesting their data-centre business at much higher multiples than their core businesses to book significant gains.
  • In terms of gross leasable area (GLA), we estimate that its portfolio stands at over 1.5msf worldwide based on available data. Assuming 45% utilisation of (generally ranges from 30- 50%) and mid-point psf (Hong Kong and Singapore: S$3,700 psf, Australia: S$2,400 psf) established from peer comparison, we value SingTel’s portfolio at S$2.0bn.
  • See attached PDF report for details on the sum-of-the-parts valuation.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2020-01-14
SGX Stock Analyst Report BUY MAINTAIN BUY 3.8 UP 3.600