SingTel - DBS Research 2020-08-17: Bharti’s Turnaround & Asset Divestment Needed To Unlock Value

SINGTEL (SGX:Z74)

SingTel - Bharti’s Turnaround & Asset Divestment Needed To Unlock Value

SingTel's 1Q21 underlying EBITDA including associates of S$1,270m, 12% below street estimates due to weak Telkomsel and accounting adjustment for Bharti.
Cut SingTel's FY21F/22F earnings by 16% each to factor in slower associate growth and weak core business.

SingTel (SGX:Z74)'s 1Q21 underlying EBITDA (including associates’ contribution) of S$1,270m (-12% y-o-y, -22% q-o-q) was 12% below street expectations of S$1,445m mainly due to weak associates. Associate’s pre-tax profit contribution of S$373m (+11% y-o-y, -28% q-o-q) was 40% below consensus estimate of S$535m, mainly due to weak Telkomsel (S$242m vs S$310m in 4Q20) and lack of improvement from Bharti (-S$79m vs - S$42m in 4Q20).
Telkomsel lost revenue share to its competitors. As for Bharti, SingTel factored an estimated S$30-35m fair value loss on a Foreign Currency Convertible Bond driven by Bharti’s share price increase from March 2020. Under India accounting standards, there was no impact on the profit and loss of Bharti though.
Meanwhile, core EBITDA from Singapore and Australia of S$897m (-24% y-o-y, -13% q-o-q) was broadly in line with consensus estimate of S$910m, helped by S$69m grant from job support scheme. The decline in core EBITDA on a sequential basis was mainly due to lower equipment sales, roaming and prepaid mobile revenues, higher SIM-only customer mix and delays or deferments of several ICT projects.
In addition, contribution from Australia was impacted by the migration of customers from Optus’s proprietary networks to National Broadband Network (NBN) which resulted in a much higher mix of NBN broadband customers at low resale margins.

SingTel’s investment in its associates, based on their market values, is worth S$2.50 per share, more than SingTel's share price. This implies a negative value for its core business in Singapore and Australia (vs. our fair value of +60 Scts per share).
The value of associate investments is likely to rise from potential turnaround of Bharti in FY21F. While the core business is not doing well, its true value can be unlocked via asset divestments - Optus towers worth 10-11 Scts per share in the near term, followed by other divestments in the medium term.
Our FY21F projected dividend per share (DPS) of 12.25 Scts translates into an 87% payout ratio and 85% of free cash flow, sustainable in the long term in our view. We expect SingTel to re-rate to 4.5% yield (15-year historic average) in a low-interest environment.

We use a 10% holding company discount for its associates whose market worth is S$2.50 per share (previously S$2.57) to reflect a slight drop in Bharti’s share price. Our fair value for SingTel's core business is S$0.60 per share (previously S$0.73) based on peer multiples as we reduce FY21F/22F core EBITDA projections by 8% each. See details in PDF report attached below.
See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.
Where we differ: Our revised FY21F earnings are 12% below consensus now.
Potential drop in Singapore, Australia and Indonesia earnings would be partly offset by ~S$500m rise in Bharti’s pre-tax earnings contribution in FY21F/22F each.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2020-08-17

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