Having endured several years of earnings decline, Singapore Telecommunications (Singtel) might just find itself turning the corner. While the operational improvements are in tandem with the recovery from the pandemic, what makes the telco interesting will be its forays beyond its traditional sphere.
It has an impending digital bank joint venture with super app developer Grab Holdings in Singapore. Given the duo’s regional footprints, they are understandably keen on the rest of Asean.
On Jan 21, Singtel announced it was paying $48 million for a 16.3% stake in Indonesia’s Bank Fama International. Incidentally, other investors in Fama include none other than Grab.
“While a small investment, it signals that Singtel-Grab digital banking partnership is not limited to the mature market of Singapore,” notes DBS analyst Sachin Mittal, who has a “buy” call and $3.43 target price on the stock. Singtel is also Mittal’s top regional telco pick.
“It may also signal that Singtel-Grab may jointly pursue opportunities in more lucrative underbanked regions of southeast Asia and not just Indonesia as Grab has a dominant presence in many Southeast Asian countries.”
Mittal points out that Bank Fama is majority-owned by Elang Mahkota Teknologi, Indonesia’s second-largest media conglomerate. Otherwise known as Emket, it is a key shareholder of Bukalapak, a leading Indonesia e-commerce platform. Last year, ride-hailing firm Gojek (and Grab rival) and Tokopedia (Bukalapak’s rival in e-commerce) merged to form GoTo. Following the merger, Grab became Emtek’s strategic partner. Furthermore, Bukalapak recently invested in Allo Bank, which is another small bank, notes Mittal.
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“If we connect the dots, it seems like Bukalapak, Grab, Emtek and Singtel are expanding the partnerships and want to make a move in digital banking. One can speculate that the big picture could be the consolidation of these small banks eventually due to capital requirement and we can hear more news on M&A about smaller banks,” says Mittal.
Of course, these new forays into financial services — if and when they do happen — will not show immediate results. In the meantime, the telco is stepping up active management of its capital.
Specifically, it has drawn up a list of noncore assets worth $2 billion to be divested. According to Mittal, these include loss-making units of Amobee, Trustwave and infrastructure assets such as fibre ducts in Australia and even Comcentre building, the company’s corporate headquarters.
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“This should also provide sufficient buffer for such growth-investments while maintaining its payout ratio north of 75%,” notes Mittal, who expects Singtel to maintain 9% earnings growth over FY2022 to FY2024. Singtel has a March fiscal year-end. As at Jan 24, Singtel shares were trading at $2.49, which is below its five-year P/E average of 25.7 times.
Last year, a major drag on Singtel’s bottom line was also removed. Its associate in India, Bharti Airtel, used to be a significant earnings contributor — until new entrant Jio ignited a brutal price war. The industry was further stressed when the government started chasing for “adjusted gross revenue”.
Last September, the Indian government eventually eased off. It gave the operators more time to pay up and allowed them the right to use the airwaves for a longer period. The price war, meanwhile, also stopped.
Singtel’s CFO Arthur Lang estimates Bharti can free up some US$1.8 billion ($2.4 billion) in free cash flow per year over the coming four years — a substantial proportion to its existing ebitda of around US$5 billion. The money can then be used to fund 5G, broadband roll-out, or even pay dividends to shareholders, which, of course, includes Singtel.
Unfortunately, Singtel has found itself entangled in another jurisdiction. Last December, it received an “unfavourable judgement” in Australia over acquisition financing incurred in 2001, when it acquired Optus for A$17 billion. It may have to pay the Australian Tax Office some A$304 million ($293 million).
Photo: Samuel Isaac Chua/ The Edge Singapore
