SingTel - OCBC Investment 2021-10-04: Focusing On Growth; Special Dividend Unlikely

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

SingTel - Focusing On Growth; Special Dividend Unlikely

  • Selling stake in towers; building regional data centre platform.
  • Sale proceeds to support 5G rollout and other growth initiatives.
  • Maintain Fair Value of S$2.89.

SingTel's 2 strategic moves

  • On 1 Oct, SingTel (SGX:Z74) made two announcements which in our view are broadly in-line with the strategic reset that it shared in May to unlock value from its infrastructure assets.
    • First, SingTel will sell a 70% stake of Australia Tower Network (ATN; wholly-owned subsidiary of Optus) to AustralianSuper at an enterprise value of ~AUD2.3b, which represents a FY21 pro-forma EV/EBITDA transaction multiple of 38x, or 28x following the completion of the build-to-suit programme (565 new sites over next 3 years). Optus will have continued access to the towers through a long-term lease agreement with ATN. Net cash proceeds after transaction costs of ~AUD1.9b is expected, which will enhance SingTel’s cash flow and balance sheet flexibility.
    • SingTel has simultaneously also announced the creation of a regional data centre (DC) business with an initial focus on ASEAN, which will form part of a regional digital infrastructure platform. SingTel has signed an MOU with Gulf Energy to build and develop data centres across Thailand, and is currently in advanced talks with Telkom Indonesia to explore acquiring and building data centre assets in the region.

Fair value estimates of S$2.89 for SingTel

  • During the briefing, management shared that in the short to medium term, SingTel is looking to build up to 100MW of DC capacity in the region over the next 3-5 years, which is on top of SingTel’s existing capacity of > 70MW in Singapore. Management believes that a regional platform would give SingTel the competitive advantage to tap into customers with regional DC needs across ASEAN. We understand that this could require ~S$1b in capex, half of which could come from debt, with the remainder from partners and SingTel’s own equity.
  • Management also shared that they are focused on sustainable dividends based on healthy operational cash flow, and thus reinvigorating core businesses would be important for growth. However, management is also mindful of one-off big ticket items (e.g. 5G capex) and the need to invest for growth, and thus capital recycling given the interest rate outlook and attractive valuations for quality assets like ATN would help to take pressure off operating cash flows.
  • While our interpretation of this is that a special dividend arising from the ATN transaction is unlikely, we are encouraged that SingTel is beginning to execute on its strategic reset, unlocking capital at a higher multiple vs the core telco business as well as the move into high growth DC markets in Thailand and Indonesia, per Frost & Sullivan.
  • We retain our fair value estimate of S$2.89 for SingTel, having previously assigned an ESG premium as SingTel has scored well on a number of key issues relative to the industry average.

SingTel - ESG Updates

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-10-04
SGX Stock Analyst Report BUY MAINTAIN BUY 2.890 SAME 2.890