Analysts are keeping their estimates on Singapore Telecommunications Z74 (Singtel) after the telco announced, on July 17, that it would back the amalgamation of Intouch and Gulf, Intouch’s largest shareholder. Both Intouch and Gulf will form a new legal entity, NewCo
The amalgamation will simplify Singtel’s stake in its Thai associate, Advanced Info Service (AIS).
‘Correct’ move in medium term: DBS
The team at DBS Group Research have kept its “buy” call with an unchanged target price of $3.50 as they see the restructuring of Intouch Holdings to be the “correct” strategic move in the medium term.
Singtel will exchange its 25% stake in Intouch for a 9% stake in NewCo with $135 million in special dividends.
“This translates to a 4% premium to Intouch's Net Asset Value (NAV) versus Intouch trading at 10% HoldCo discount to its NAV historically,” says the team, adding that it would have been “difficult” for Singtel to sell its stake in Intouch in the market directly.
In connection with the amalgamation, Intouch, Gulf and Gulf’s major shareholder, Sarath Ratanavadi, will have to conduct a conditional voluntary tender offer (VTO) for the shares they do not own in AIS’s public float. Shareholders were offered THB216.30 ($8.07) per share under the VTO.
To the DBS team, AIS’s shareholders may not accept the VTO as the offer price is some 2% below AIS’s last-closed share price of THB220 as at the team’s report dated July 17. Furthermore, Singtel may not be able to top-up its direct stake of 23% in AIS as a stake above 25% would trigger a VTO, per Thai rules.
Meanwhile, the team thinks Singtel should be open to sell its 9% stake in a “highly liquid” NewCo in one to three years, since the new entity is not strictly a telecom or a data centre business. The sale could count as part of the telco’s divestment target of $6 billion in three years, it adds. Based on the team’s estimates, the sale could fetch between $1.5 billion to $1.8 billion.
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Despite the upbeat medium-term outlook, the DBS team says it is “neutral” on this transaction in the near term. Singtel itself has guided for a “neutral impact” on its earnings from its 9% stake in NewCo compared to its 25% stake in Intouch previously.
The overall special dividend of $135 million translates to 0.8 cents per share, which could lift Singtel’s dividends slightly, the team notes.
Amalgamation gives ‘greater flexibility’ to Singtel
The amalgamation could give Singtel “greater flexibility” to either monetise its stake or remain invested, say CGS International analysts Kenneth Tan and Lim Siew Khee, adding that they view the swapping as a “positive”.
“Currently, we think it is tough for Singtel to effectively divest its Intouch stake in view of Intouch trading at a HoldCo discount ([around] 10% by Singtel’s estimates), and relatively low liquidity,” they write in their July 17 report. “Singtel shared that NewCo will be one of the largest and most liquid public companies in Thailand, making it easier for Singtel to explore potential monetisation opportunities over the longer-term, in our view.”
“NewCo will also have greater exposure to the renewable energy/power generation sectors ([around] 60% of FY2023 proforma operating profit), which we think could benefit from Thailand’s energy transition initiatives,” they add.
However, they see that the telco is “unlikely” to acquire the maximum 10% stake in AIS in view of the discounted offer price. Singtel will be participating in the VTO as a joint offeror and can buy up to an additional 10% stake in its Thai associate.
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“We think a sub 5% stake purchase is more likely, which should be comfortably financed via cash/asset recycling proceeds. In the event Singtel is able to amass a more meaningful stake, there could be valuation upside, as AIS currently forms [around] 9% of our sum-of-the-parts (SOTP)-based target price,” write Tan and Lim.
For the time being, the analysts have kept their estimates unchanged. They have also kept their “add” call and target price of $3.30.
“We like Singtel for its healthy FY2025 – FY2027 earnings per share (EPS) trajectory and decent yield,” they say.
Singtel may exit NewCo, says Maybank Securities
Maybank Securities analyst Hussaini Saifee has also kept his “buy” call on Singtel with an unchanged target price of $3.40 after the news of the restructuring of Intouch.
Based on his estimates, the deal would be dilutive for Singtel’s earnings by 1%. Gulf’s EPS for the calendar year (CY) 2025 is lower than Intouch’s EPS even after adjusting for the swap ratio, Hussaini points out in his July 17 report.
“Also, if NewCo maintains a similar payout ratio to Gulf Energy, we estimate that would lead to a 43% reduction in Intouch dividends, or $45 million [per] year net dividend cash flow loss for Singtel,” he adds.
That said, he notes that the dilution can be bridged by special dividends of some $122 million from Intouch. The overall impact on Singtel’s earnings would also likely be reflected in its FY2026 ending March 2026 financial performance.
Like his peers at DBS, Singtel may eventually exit NewCo as it will be a non-telco conglomerate outside of Singtel’s telco and data-centric businesses.
“Singtel has in the past exited minority stakes in telcos in Taiwan, Pakistan & Africa,” says Hussaini, referring to its sales in Far Eastone Tel, Warid Telecom Pakistan and Airtel Africa in 2012, 2013 and 2022 to 2023 respectively.
“Relative to Intouch, NewCo would be highly liquid which in turn would help to facilitate the divestment process, in our view. At Gulf Energy’s current share price, we estimate Singtel’s 9% stake in NewCo is valued at about $2.2 billion,” he adds.
On the VTO, Singtel’s outgo would be at $2.4 billion. The telco set an upper limit on the AIS VTO at 10 percentage points of the total number of the Thai listco’s shares.
This means Singtel’s Net debt/Ebitda for FY2026, including its associate dividends, will rise to 1.6 times from 1.4 times, based on Hussaini’s calculations.
“[This is] quite manageable in our view to pay guided dividends,” he says.
However, like his peers, the Maybank analyst sees a “limited tendering” of AIS shares with the VTO being at a discount to the Thai listco’s current share price.
Hussaini expects Singtel’s earnings for the FY2025 to FY2027 to increase at a compound annual growth rate (CAGR) of 16%, mainly helped by its associates.
He also expects the telco’s consolidated ebitda to post a CAGR of 4% over FY2024 to FY2027 mainly due to moderate revenue growth and cost cuts.
“We expect net debt to ebitda, including associates, to remain healthy at below 2 times in FY2024 to FY2026, providing support to its dividend per share (DPS) commitment,” he writes.
OCBC lifts target price
In an earlier report dated July 15, the research team at OCBC Investment Research (OIR) has increased its target price to $3.50 from $3.04 previously.
“Singtel’s [share] price rallied [some] 23% during our last published report on May 23 and 22% year-to-date (ytd),” the team points out.
“We believe the share price outperformance was largely driven by Singtel’s recent data centre deals; the announced price hikes for both Optus and Bharti; improved investor sentiment on Singtel’s growth outlook with a potential turnaround of ebitda growth after six years’ declines; and rising confidence on the dividends, driven by Singtel’s strong cash flow and capital management potential,” it adds.
Furthermore, the two data centre deals, which come in line with the telco’s Singtel28 strategy, will make Singtel a beneficiary of the strong data demand in the region.
“The growth from data centres is likely to support the core business which has been facing challenges due to competition and foreign exchange (forex) headwinds,” the team writes.
Singtel unveiled its Singtel28 strategy, which is a new growth plan that’s designed to deliver enhanced customer experiences and sustained value realisation for shareholders, on May 23.
On the same day, the telco announced the addition of a new “value realisation dividend” of 3 to 6 cents per annum (p.a.), on top of its core DPS. Singtel has a dividend payout ratio of between 70% to 90% of its underlying patmi.
“We estimate a value realisation dividend of 4.5 cents per share in FY2025. Together with the core DPS, this could bring FY2025’s total DPS to 16.7 cents, translating to a dividend yield of 5.7%,” the team says.
“With the potential rate cuts in 2H2024, Singtel’s dividend yield looks attractive,” it adds.
The OIR team has also kept its “buy” call on the telco.
PhillipCapital downgrades on price rally
PhillipCapital analyst Paul Chew has downgraded his call on Singtel to "accumulate" due to the telco's recent share price rally.
However, like his peers, Chew is "positive" on the latest transaction as it partly monetises Singtel's stake in Intouch and AIS with the special dividend of $135 million.
"Furthermore, the Intouch stake will become part of a much larger (and likely more liquid) Newco with a market cap of $25 billion," he adds. "We believe the trade-off is lower dividends from Intouch into a faster-growing NewCo, propelled by the planned build-up of energy assets."
In addition, the eventual listing of NewCo's shares above the implied THB45 per share will be a "value-accretive" catalyst, writes Chew.
Despite the downgrade, the analyst has increased his target price estimate to $3.44 from $3 as the discount on associates is lowered to 20% from 30%.
"The discount is narrowing as Singtel moves closer to achieving its $6 billion divestment target. No change in our forecast," says Chew.
Shares in Singtel closed 4 cents higher or 1.32% up at $3.06 on July 18.
