SingTel - DBS Research 2020-05-29: Undervalued Or Value Trap?

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

SingTel - Undervalued Or Value Trap?

  • SingTel (SGX:Z74)'s 4QFY20 underlying earnings of S$594m (-15% y-o-y, +8% q-o-q) was 15% above our S$518m estimate due to stronger associates’ and Singapore operations.
  • SingTel's FY20 final dividend per share (DPS) of 5.45 Scts was below our estimate of 10.7 Scts.
  • We expect a 12.25-Sct annual DPS to be sustained in the long term and the stock to re-rate to 4.5% yield.
  • BUY with slightly lower target price of S$3.09.

We expect SingTel to re-rate to 4.5% yield while asset-divestment might unlock the trapped value.

  • A record 38% holding company discount (vs 16% historic average) assigns a negative value of -10 Scts per share to the core business in Singapore & Australia (vs. our +74-Sct estimate). This is due to investors being worried about dividend cut at SingTel, which is a past event now.
  • We expect SingTel to re-rate to 4.5% yield (15-year historic average) in a low-interest environment as FY21F projected DPS of 12.25 Scts at 75% payout ratio is likely to grow in the long-term. See SingTel Dividend History.
  • SingTel offers annual earnings growth of 6% over FY20-22F. Core business mispricing is likely to be resolved with potential divestment of towers (worth 10-11 Scts per share) in the near-term.

Superior earnings but dividend disappoints

SingTel's 4QFY20 underlying earnings of S$594m (-15% y-o-y, +8% q-o-q ) was 15% above our S$518m estimate.

  • This was mainly due to stronger-than-expected
    1. associate’s post-tax earnings of S$398m (+20% y-o-y, +35% y-o-y) vs our estimate of S$350m led by Bharti, Globe and Telkomsel with the latter as the key surprise.
    2. total core earnings from Singapore and Australia of S$198m (-47% y-o-y, -24% q-o-q) was also ahead of our S$168m estimate mainly due to a stronger Singapore offsetting weak Australia operations.

Final dividend per share (DPS) of 5.45 Scts was below our estimate of 10.7 Scts.

  • SingTel's FY20 DPS of 12.25 Scts (81% payout ratio) is below the official guidance of 17.5 Scts. Management cited COVID-19 uncertainty and upcoming 5G capex as the reason.
  • In our opinion, SingTel is keen to maintain its current credit rating as the ratio of net debt to adjusted EBITDA (core EBITDA plus dividends from associates) stood at 2.2x versus 2.0x required for Moody’s A1 rating. Assuming a 12.25-Sct DPS in FY21F, this ratio should fall back to 2.0x in FY22F in our estimates even without any asset divestment.
  • SingTel did not issue any official guidance for FY21F due to COVID-19 uncertainty along the expected lines.

Singtel’s gearing to fall even without any asset divestment.

  • SingTel’s net debt-to-adjusted EBITDA (core EBITDA plus associate dividends) stands at 2.2x in FY20F and is likely to fall to 2.0 in FY22F supported by lower dividends of 12.5 Scts per share in our estimates.
  • We expect SingTel to divest some of its assets to unlock the value of its core business. If towers in Australia are divested in FY21F, net debt-to-adjusted EBITDA might decline to 1.9x in FY21F itself.

SingTel plans to divest its telco towers in Australia which are worth ~S$1.6-1.7bn (10-11 Scts per share).

  • SingTel has acknowledged that plans are underway for a sale and leaseback of Optus’s towers. Optus has over 2,500 towers spread across over 1,000 regional towns as per the telco’s website. These towers are reportedly worth A$2bn or ~S$1.7bn.
  • The funds from the deal are expected to be utilised to improve Optus’s 4G regional coverage and to fund its 5G network rollout without further burdening the balance sheet. However, one of the potential risks of a sale and leaseback is the possibility of opening the towers to external tenants such as Vodafone Hutchison Australia or TPG.

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

We value SingTel’s digital businesses, comprising Cyber-Security and Digital Life at S$2.4bn or 14 Scts 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 12 Scts 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 1.5m sf worldwide based on available data. Assuming 45% utilisation (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.

Where we differ: Our FY21F earnings are 7% below consensus.

  • We estimate National Broadband Network (NBN) fee in Australia to drop by ~A$300m in FY21F. We project FY21F DPS of 12.25 Scts in FY21F as this should allow net debt-to-adjusted EBITDA (core EBITDA plus associate dividends) to fall from 2.2x in FY20 to 2.0x in FY22F even without any asset divestment.
  • See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News
  • SingTel’s associates, based on their market values, are worth S$2.61 per share without any holding company discount. Core business is worth S$0.74 per share but is assigned a negative value by the market.
  • See SingTel's sum-of-the-parts valuation details in PDF report attached below.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2020-05-29
SGX Stock Analyst Report BUY MAINTAIN BUY 3.09 DOWN 3.220