Singapore Telecommunications' Z74 (Singtel’s) sale of a 20% stake in its regional data centre business to Kohlberg Kravis Roberts & Co (KKR) for $1.1 billion is the latest move by the telco to unlock value of its infrastructure and assets while recycling capital to fund new growth. The transaction implies the regional data centre (RDC) business to have a value of $5.5 billion and 31x FY2024 EV/Ebitda.
Under terms of the deal announced on Sept 18, KKR also has the option to increase its stake in this business to 25% by 2027 at a pre-agreed valuation. Funding from KKR, as Singtel’s new strategic partner, will be committed on a progressive basis over three years to help speed up the expansion of the RDC across Asean and to also provide Singtel with more flexibility on how to monetise this business down the road.
Singtel’s regional data centre business is part of the Digital InfraCo unit which was formed in June. In addition to 62MW of existing capacity in Singapore, Singtel is building a new 58MW data centre at Tuas. The telco has also partnered Telkom and Medco Power in Indonesia and Gulf and AIS in Thailand to develop data centres in Batam and Bangkok respectively. Come 2025, Singtel’s regional data centre portfolio will have a total capacity of over 155MW, with room to scale up to more than 200MW.
Bill Chang, CEO of Singtel’s Digital InfraCo, says: “Our expertise in designing, building and operating data centres, and our connectivity leadership in the region, together with KKR’s strong track record in supporting digital infrastructure assets and its platform-building expertise makes for a powerful combination.”
KKR not only brings funding to the table and helps illuminate the latent value of these assets but it also had the expertise and global network that Singtel can benefit from.
Asked if Singtel might consider spinning off the data centres for its own listing, CFO Arthur Lang says that with KKR on board, Singtel will have more ways to unlock value. “That could be bringing in another minority investor or an IPO where we still own the majority. There are various options and it is something probably too early to talk about,” says Lang.
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Upbeat views
Meanwhile, analysts have largely maintained their upbeat views following this latest news. UOB Kay Hian’s Chong Lee Len and Llelleythan Tan note there is minimal near-term earnings impact and have thus maintained their “buy” call and $3.15 target price. However, with the transaction, Singtel has unlocked $2 billion out of $6 billion of latent value. “The cash proceeds would be used for future expansion and may lead to special or higher dividends,” say Chong and Tan.
They note that in 2021, KKR acquired CyrusOne, a much larger and stable global data centre operator, at 25x EV/Ebitda. “This underscores the quality of Singtel’s regional data centre portfolio and growth potential,” say the UOB Kay Hian analysts.
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“We view the growth capital by KKR positively to drive the next leg of Singtel’s regional data centre business with partial value unlocking of the latter’s unique infrastructure assets at a good premium,” says the RHB Bank Singapore’s research team, which has kept its “buy” call and $3.40 target price following the announcement.
Down the road, they estimate another $4 billion in capital could be recycled, leading to higher dividends. “Given the group’s strong balance sheet (over $3 billion cash hoard as at 1QFY2024), debt headroom and excess cash ($2 billion) after the payment of 5G capex and spectrum, we see scope for further additional/special dividends (over and above the ordinary payout of 60%–80% of group core earnings),” says the research team.
The $5.5 billion valuation that is implied in this deal is about 60% higher than the $3.4 billion estimated by DBS Group Research, which calculates that the news will add some $2 billion to Singtel’s total fair value. “Singtel is trading at an attractive 45% holding company discount possibly due to a slower recovery at Optus Australia, which is hurt by high inflation in the country, although the recovery is still intact with tariff hikes undertaken in late July 2023,” says DBS, which is also expecting dividends to increase over the next three years. DBS has a “buy” call and $3.18 target price.
Kenneth Tan and Lim Siew Khee of CGS-CIMB Research observe that the implied transaction multiple of 31x is higher than global peers’ range of 20–25x EV/Ebitda but the deal, in their view, is fair. However, they note that contributions from Singtel’s data centres in Thailand and Indonesia, with a total of 91 MW, are not consolidated given they are 35%-owned associates, and Singtel’s RDC FY2023–2026 ebitda growth is likely stronger versus peers given its almost doubling of capacity in Singapore to 120MW by 2025, according to Tan and Lim, who have kept their “add” call and $2.80 target price
