CGS-CIMB analysts have reiterated their “add” call and $3.30 price target on Singapore Telecommunications following the telco’s win for one of the five digital banking licences in Malaysia as part of a consortium with Grab Holdings and Kuok Brothers.
GXS, a 60-40 Grab-Singtel joint venture already holds a digital banking license in Singapore awarded in late 2020. GXS holds a 55.45% stake in the consortium that also includes Kuok Brothers. This gives Singtel an effective stake of 22.2% in the consortium, which is only likely to commence operations after going through a period of “operational readiness” over the next one to two years.
In their April 30 note, CGS-CIMB analysts Foong Choong Chen and Sherman Lam Hsien Jin describe this win as a “positive development” for Singtel, as it marks a meaningful regional digital banking business in the making.
Besides Singapore and most recently, Malaysia, Singtel-Grab had in January this year entered Indonesia’s financial services sector by taking a 32.5% stake in Bank Fama International.
They do not expect the venture in Malaysia to “contribute much” to Singtel’s FY2022 to FY2024 earnings given the three-to-five-year foundational phase and subsequent costs to drive customer acquisitions. Singtel has a March year-end.
“On the other hand, the low minimum capital requirements for (the digital bank) suggest that Singtel’s portion of the investment will be relatively small in the initial years and can be comfortably funded by internal cash and its asset recycling initiatives, in our view,” state Foong and Lam.
As required by Bank Negara Malaysia, winners of the digital banking licenses are to put in RM100 million as a minimum capital requirement for the foundational phase and an additional RM300 million thereafter.
Citing what happened in South Korea, the CGS-CIMB analysts estimate that the five licence winners might win a 2% market share in loans by end of calendar year 2027, worth some RM51 billion. If they can win over the previously underbanked and underserved segments, that might bring the total to RMB103 billion.
Assuming the Grab-Singtel venture wins a quarter share of this market, it could possibly build a loan book of some RM26 billion and a book value of RM3.8 billion by end of 2027.
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By applying a price to book value of 0.5x, the Grab-Singtel digital bank in Malaysia may have a value of some RM19 billion by end of 2026, which, given Singtel’s effective stake of 22.2%, will translate into 7 cents per share.
If added to the Singapore digital bank assumed value of 30 cents per share and 8 cents for Indonesia, the CGS-CIMB analysts estimate that Singtel’s regional digital banking business can add 30 cents to its sum of the parts valuation in three to four years’ time.
“We have not factored this in as investors may not ascribe much value to it until operational indicators are available and Grab-Singtel is closer to unlocking GXS’s value,” add the analysts.
Singtel last traded at $2.77.
