Singapore Telecommunications (Singtel) has been under the spotlight most recently.
On March 13, news broke that the group was in advanced talks to fully divest its Australian arm Optus, to Toronto-headquartered private equity giant Brookfield for A$16 billion ($14 billion), according to Australian Financial Review (AFR). However, later that day, Singtel issued an announcement to say that there is "no impending deal to offload Optus for the said sum".
See more: Singtel denies impending sale of Optus
On March 14, the word is that Singtel is thinking of a divestment, but a partial and minority one. With that, the group has been said to have hired JPMorgan to mandate this possible minority stake sale to Brookfield.
Despite all the chatter in the market, analysts are keeping positive on Singtel and keeping their “buy” calls, as they wait for the group to recycle its assets and illuminate more value. Analysts are also singing the same tune, saying that the stock is indeed undervalued.
DBS Group Research has kept its “buy” call and $3.27 target price on Singtel. Deal or no deal, the research house sees the stock as undervalued, as its associate investments alone are worth $2.51 per share, higher than Singtel’s current share price of $2.45, as at 10.45am on March 14. This implies a negative valuation for the group’s core business.
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Singtel’s current share price suggests that the market has assigned slightly negative value to the group’s core business in Singapore & Australia. The underlying reason could be Optus’ low return on invested capital (ROIC) below 2% based on annualised which is far below its cost of capital of 7-8%. While Optus is on a recovery path with industry-wide tariff hikes, its ROIC is sub optimal.
While Singtel has refuted claims of a full divestment, DBS notes that this cannot be ruled out in the medium term, as Singtel offers 5.1% yield with 6% earnings CAGR over the next two-years. Singtel can easily sustain 90% earnings payout ratio over the next four to five years on the back of its successful divestment programme.
Earnings growth is expected to stem from recovery in core operating profit led by recovery in Optus plus growth in ICT services and sharp growth in Bharti’s earnings from continued tariff hikes.
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Meanwhile, RHB Bank Singapore too has maintained a “buy” call and $3.15 target price on Singtel, while keeping it as a top pick in the Singapore telecommunications sector. It also has a “neutral” rating on the Singapore telco space.
UOB Kay Hian too has kept its “buy” call and $2.99 target price on Singtel, following news of the no deal.
“We believe this news helped illuminate value of its underlying asset as Singtel’s current market capitalisation reflects little value of its Singapore consumer business and Optus asset,” say analysts Chong Lee Len and Llelleythan Tan.
While the analysts do not expect Singtel to sell a substantial stake in Optus, they also do not discount a potential stake sale in Optus should a strategic partner emerge. Optus generated 9MFY2024 ebitda and ebit of $1.4 billion and $190 million respectively. At an enterprise value of A$16 billion – A$18 billion, Optus would be valued at 7.5x-8.5x EV/ebitda.
The way Chong and Tan see it, a potential stake sale could help to drive operational synergies and earnings while serving to ‘illuminate’ value in Optus. Based on Singtel’s current market capitalisation of $41 billion, its associate stake alone is worth an estimated $49 billion. Even with a 20% holding company discount, the Singapore consumer business and Optus Australia comes for free. As such, any potential monetisation exercise of Singtel’s assets is deemed positive. “We estimate that the Singapore consumer business and Optus account for 20-25% of group’s profit before tax,” they say.
Citi Research has also reiterated its “buy” call and $2.88 target price, as analysts Arthur Pineda and Luis Hilado see the deal as a potential opportunity to create further value and drive yield.
Based on the analysts estimates, they have assumed an enterprise value (EV)of about A$6.9 billion for Optus which conservatively translates to just about 3x FY2024 EV/ebitda. A transaction EV of near A$16 billion would translate to about 7x FY2024 EV/ebitda for Optus which indicates potential accretion versus Citi estimates.
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“A stake sale would allow for the market a better read-through and appreciation on Optus’ underlying valuations,” say the analysts, who has estimated a 49 cents per share accretion on the potential deal based off a A$16 billion valuation.
If a transaction is executed at 4.5x ebitda (in-line with telco sector averages), the analysts estimate an implied EV of about A$10.2 billion which in turn translates to an incremental 17 cents per share value accretion to their current estimates.
As at 10.45am, shares in Singtel are trading at $2.45.
