SingTel - DBS Research 2021-05-25: Can Divestments Cure Mispricing?

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

SingTel - Can Divestments Cure Mispricing?

  • We expect SingTel to report 2H21F underlying profit of S$1,020m on 27th May, up 22% sequentially led by Bharti & Optus.
  • We raise our fair value estimate of SingTel's core business to 58 cents (46 cents earlier) after factoring in the value of key divestible assets.
  • Maintain BUY call on SingTel with a higher target price of S$2.93.

We expect SingTel to report underlying net profit of S$1,020m in 2H21F.

  • We project SingTel (SGX:Z74)’s 2H21F underlying net profit at S$1,020m, a 22% sequential increase (-11% y-o-y) supported by rise in associate contributions led by Bharti Airtel and Globe, coupled with a sequential rise at Optus.
  • Australia consumer business is witnessing a recovery which is evident from its sharp turnaround in its EBIT (excluding NBN) to S$36m (from a S$16m EBIT loss in 2Q20), driven by increasing penetration of Optus Choice Plans which generate superior margins.
  • Singapore consumer business remains weak as both roaming and prepaid revenues are expected to be suppressed by travel restrictions.

Core business is expected to continue its recovery led by structural repair at Optus and recent price hike in May 2021.

  • Optus consumer business has been declining, excluding NBN revenue, over the last 7 quarters due to lower weaker mobile services revenue and lower equipment sales. The reduction in mobile services revenue were due to higher SIM-only customer mix and heightening data pricing competition coupled with lower roaming, late payment fee waivers and credits to frontline healthcare workers coupled. However, the launch of Optus Choice plans has commenced a gradual recovery of the mobile business.
  • Optus Choice plans offer bundled 5G connectivity with A$5-6 higher average revenue per user (ARPU) in comparison to pure 4G plans. These plans also offer improved margins benefitting the bottom line. As the penetration of these plans increase, we expect to see a sharp turnaround in the Australia business. Recently in May 2021, Optus has raised pricing of its SIM-only plans by A$6 across the board after delaying its price hike last year due to the pandemic.

Bharti Airtel recorded net profit before exceptional item of Rs 3.2bn, first time since 4Q18.

  • Bharti Airtel’s operational performance continued its improvement, recording a net profit excluding exceptional items of Rs 3.2bn The last time Bharti Airtel reported a net profit excluding exceptional item was in 4Q18 of Rs 0.8bn. Bharti Airtel’s ARPU has been on an upward momentum since 2Q20 from Rs 128 till Rs 166 in 3Q21.
  • In 4Q21, Bharti Airtel’s ARPU was at Rs 145, however this has been adjusted to TRAI (Telecom Regulatory Authority of India) guidelines effective from 01st January 2021. Mobile Termination Charges in Mobile – India business have been reduced to INR 0.00 per min from INR 0.06 per min.
  • Accordingly, adjusted ARPU fell from Rs 146 in 3Q21 to Rs 145 in 4Q21. On the associate contribution front to ST, Bharti Airtel will be the key growth driver and in 4Q21F, we expect Bharti Airtel to contribute S$18m profit compared to a loss of S$28m in 3Q21.

In our view, Singtel could divest assets worth 29-31 cents per share – Optus’s towers in the near term, followed by others.

  • According to media news, the proposed sale and leaseback of Optus’s towers began on 15 April 2021 – attracting investors from both Australia and abroad. The estimated value of the project is ~A$2.0bn (~S$2.08bn). Towers in Australia tend to be valued at 18x-20x EV/EBITDA while core telco business is valued at only 5x EV/EBITDA, implying big room for unlocking of trapped value.
  • Optus has over 2,500 towers spread across more than 1,000 regional towns as per the telco’s website. The funds from the deal are expected to be utilised 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.

SingTel's Valuation

  • SingTel's non-core businesses are worth over S$1.3bn or S$0.08 per share.
  • 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 and telco business at ~6x, suggesting 60-70% undervaluation of DC assets. Pure-play DC operators tend to structure their businesses in the form of real estate investment trusts (REITs), yielding tax efficiencies and higher distributions for their owners. This creates a natural premium due to higher cash flow transparency, thereby 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 businesses 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 of (which 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.
  • We value SingTel’s digital businesses, comprising Cyber-Security and Digital Life, at S$1.2bn or S$0.07 per share at a lower valuation after recent impairment exercise.
    • The Cyber Security segment is valued at S$688m, based on its latest carrying value. The Digital Life segment, which largely comprises the Ad-Tech firm Amobee group, has been valued at S$505m as per its latest carrying value.

We raise our fair value of SingTel's core business to S$0.58 (vs S$0.46 earlier) after factoring in the fair value of divestible assets.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2021-05-25
SGX Stock Analyst Report BUY MAINTAIN BUY 2.93 UP 2.750