Analysts are upbeat on Singapore Telecommunication’s (Singtel) prospects following its announcement on Mar 7 that its enterprise arm NCS is acquiring a 100% stake in Australia’s largest privately-owned IT services consulting company, The Dialog Group, for A$325 million ($325 million).
See: Singtel's NCS acquires The Dialog Group in Australia for $325 mil
This move will allow the group to expand its footprint in its Australian ICT space, which has previously been identified as a target market and is seeing an acceleration in revenue momentum.
Citi Investment Research analyst Arthur Pineda says, “We see the move as near-term profit neutral with Dialog already profitable according to Singtel, serving to counter the additional financing costs related to the acquisition.”
The way Pineda sees it, Dialog will allow NCS to more quickly scale up in Australia with over 1000 IT specialists already on board. In addition to the talent pool, Dialog also brings in enlarged public (various local governments and federal government agencies) and private sector clients.
Momentum is likely behind it as based on Gartner estimates, IT spending in Australia is projected to grow to a decade-high 6.5% in 2022. “Singtel and NCS’ enlarged capabilities and expanded relationships following its acquisition should put the company in a position to grow even faster,” says Pineda.
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Furthermore, unlike the group’s prior acquisitions of Amobee or Trustwave which fragged the group’s profitability levels, Dialog is already a profitable entity, generating some A$176 million in revenue and A$12 in profits in its last fiscal year ended June 2021.
‘As such, we see that from an earnings standpoint, the move will not dilute group profitability with the added interest burden offset by Dialog’s own profits. The acquisition can potentially move from neutral to accretive if/when NCS’ Australia business can be scaled up although we think the street will likely require proof of execution before assigning any such benefit,” says the analyst, who also expects minimal impact on gearing.
While Citi has kept its “buy call” with a target price of $3.44, RHB Group Research is also positive on the stock, as it maintains its “buy” recommendation with a target price of $3.37. Singtel is also RHB’s preferred Singapore telco pick on an earnings recovery thesis.
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The RHB research team says, “We view Singtel’s latest enterprise M&A in Australia positively to strengthen its Asia Pacific B2B digital ambitions and capture new growth opportunities. The deal forms part of the group’s strategic business reset, and rides on the coattails of value-accretive corporate actions executed over the past six months.”
Dialog will grant immediate access to a pool of long-serving and lucrative Tier-1 enterprise customers, and unlock significant revenue and cost synergies via the pooling of resources (talent and headcount) across jurisdictions. NCS’s IT headcount in Australia will also triple to about 1,300.
More importantly, the transaction should be a good strategic fit, with NCS and Dialog combining their core strengths to deliver advanced digital services and solutions.
As at 3.15pm, shares in Singtel are trading at $2.51 or 1.5 time FY2022 book with a dividend yield of 3.7%.
