SingTel - UOB Kay Hian 2020-12-07: Grab-SingTel Secures Digital Full Banking Licence, Positive In The Long Term

SINGTEL (SGX:Z74)

SingTel - Grab-SingTel Secures Digital Full Banking Licence, Positive In The Long Term

We are positive on the Grab-SingTel (60:40) consortium award of a digital full banking licence in Singapore. In the near term, earnings impact to SingTel (SGX:Z74) is limited as we assume a 4-5 years’ gestation period. Importantly, an initial equity injection of S$600m is manageable, as it will raise FY21 net debt/EBITDA from 1.9x to 2x.
Maintain BUY on SingTel with a marginally higher DCF-based target price of S$2.84/share, as we value the digital banking licence win at 4 cents (or 2% of market capitalisation), conservatively.

The Grab-SingTel (60:40) consortium secured a digital full banking (DFB) licence from the Monetary Authority of Singapore (MAS) on Friday. The DFB allows the consortium to serve both corporate and retail customers.
MAS has given all DFB licensees until end-21 to meet all relevant licensing preconditions (such as minimum paid-up capital, capital and liquidity rules and etc) before the MAS grants them their respective licences. The new digital banks are expected to commence operations from early-22.

We are positive on the award of DFB licence to the consortium, in which SingTel has a 40% equity stake. This allows SingTel to stack the new business segment to help drive future earnings growth and diversify away from its key telco mature assets.
The partnership will allow both parties to leverage on their extensive customer bases. This will help to provide competitive advantage for the consortium in terms of speed of product launch to the market and economies of scale (lower customer acquisition cost).

As the Grab-SingTel consortium focuses on:
1. fulfilling MAS’s licence requirements;
2. drawing up product proposition; and
3. focusing on innovative digital delivery platform
- in the next 12-24 months, we see little earnings impact for SingTel between FY21-23.
We believe meaningful earnings contribution to SingTel will materialise only in 4-5 years’ time. This is because the new licensees are digital-only banks and do not have any physical branches (only one physical office for face-to-face interactions with customers). DFBs are not allowed to operate automated teller machines (ATM)/cash deposit machines (CDM) or join any existing ATM/CDM networks.
A faster-than-expected take-up rate and exceptional customer experience can help drive early earnings accretion from this digital banking venture, we opine.

The Grab-SingTel consortium is expected to have a minimum paid-up capital of S$1.5b by 2022. Based on SingTel’s 40% equity stake, the equity contribution is S$600m. This will raise our estimated FY22 net debt/EBITDA for SingTel from 1.9x to 1.99x. We believe this debt level is manageable and will not impact SingTel’s ability to pay out lush dividends in the near term.
We project SingTel's FY21 net dividend of 11.5 cents, translating to an attractive net dividend yield of 5%.

Winning the DFB licence is worth S$610m (or 4 cents) to SingTel, we opine. This is based on the following assumptions:
1. a 30% discount to long-term mean P/B of 1.45 for Singapore banks;
2. a S$1.5b minimum paid-up capital; and
3. 40% stake in the Grab-SingTel consortium.

No change to our earnings estimates for SingTel.
See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.Maintain BUY with a marginally higher DCF-based target price of S$2.84 (discount rate: 7%, growth rate: 1.5%) as we include the equity value of a DFB licence in Singapore.
At our target price, SingTel trades at 14x FY22F EV/EBITDA (5-year mean EV/EBITDA). We believe earnings weakness is largely priced in as SingTel's share price has retraced 31% year-to-date, and trades at -1SD below its 5-year mean EV/BITDA.
Key re-rating catalysts for SingTel's share price include:
1. reopening of economies towards end-20/early-21;
2. monetisation of 5G;
3. faster-than-expected recovery in Optus’ consumer and enterprise business, and
4. market repair in Singapore.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2020-12-07

SGX Stock Analyst Report BUY MAINTAIN BUY 2.84 UP 2.800