What do Singapore-listed companies like Singapore Telecommunications Z74 (Singtel), Fraser and Neave (F&N) Singapore F99 , and Wilmar International F34 have in common?
At first glance, not much. But dig just a little deeper and you will find that all three companies own stakes in separately listed subsidiaries whose values are near or even higher than their own.
Singtel and its subsidiaries
Singtel is a key example of an undervalued “parent” company where the sum of parts of its subsidiaries and regional associates, both listed and privately held, far exceeds its market value.
Besides its extensive offerings in Singapore, which include networks, data centres and other telco infrastructure, Singtel fully owns an Australian subsidiary, Optus. It is also a key shareholder in other telcos in the Philippines, Thailand, and, most notably, Bharti Airtel of India.
Airtel has been an associate of the telco since Singtel first began acquiring shares in the former in 2000. The recent gain in Bharti’s share price, amid an overall bull run in India, has further accentuated the underperformance of Singtel’s own share price.
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As at April 12, Bharti Airtel’s market capitalisation stood at INR7.24 trillion ($118.13 billion), after its share price gained over 50% during the past 12 months. This puts Singtel’s 29% stake at $34 billion, compared to its own market capitalisation of $39.14 billion.
On March 7, Singtel sold 0.8% of its direct stake in Airtel to GQC Partners, a US-based investment firm, for $0.95 billion. The sale will net the telco $0.7 billion in gains. Besides shining the spotlight on the market value its Bharti stake can fetch from third-party investors, this marginal divestment serves another purpose: Singtel can cash in partly on its investments, and channel the proceeds for other purposes.
The April IPO of Bharti Hexacom, a unit of Bharti Airtel, has further boosted the latter’s value, which has been enjoying a turnaround of its business over the last year or so as competitive pressure eased. Shares in Bharti Hexacom closed at INR813.30, 43% higher from its debut. According to Bloomberg, Bharti Airtel owns an approximate 70% stake in Bharti Hexacom, which is worth around INR297.5 billion.
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In his April 16 note, Maybank Securities analyst Hussaini Saifee points out that Singtel’s holding company discount has again breached the 40% mark. He believes that Singtel is undervalued by the market because of the recent spate of cyberattacks and network outages suffered by Optus, its Australian subsidiary.
Investors are also watching closely if Singtel can sustain the improvement in its dividend payout, he adds. Its payout of 7.5 cents for FY2021 marked a recent low point and has since improved to 14.9 cents for the most recent full year FY2023. However, that’s still a gap from as high as 20.5 cents per share paid back in FY2018.
Saifeen observes Singtel last suffered this level of holding company discount in late 2021 when it was deemed a tad too heavily geared. Via a series of divestments and asset monetisation, its balance sheet has been de-levered “significantly”. Its dividend payout has also improved by around a third versus its FY2022 ended March 2022.
With the holding company discount widening, Singtel’s current share price reflects only the value of its India, Indonesia and Thailand exposure. “In other words, we are getting Singapore (including data centres, GxS, Netlink NBN Trust), Australia and the Philippines for free at the current share price of Singtel,” says Saifee, who calls Singtel a “rarity” as the brokerage reinstated coverage of the stock with a “buy” call and sum-of-the-parts based target price of $3.05.
Saifee estimates Singtel to record an earnings CAGR of 15% over the current FY2024 to FY2026 ending March 2026, which puts Singtel at the higher end within Singapore and other Asean telcos covered by Maybank Securities. “While the bulk of this growth would come from Bharti, we also see cost-cutting initiatives and foreign exchange (FX) stabilisation to support growth,” he adds.
He does not rule out Singtel trimming its stake in Bharti further down the road, especially if the dividend payout Singtel can enjoy from Bharti remains “non-meaningful”, relative to the capital gains that Singtel is making. “While Bharti remains a strategic holding for Singtel its current stake at 29% is not sacrosanct,” says Saifee, who points out that proceeds from regular trimming of Singtel’s stake in Bharti can help boost the former’s free cash flow, which can then be used to support Singtel’s own dividend payout.
By assuming a payout ratio of 85%, the analyst estimates Singtel to pay a dividend of 12 cents for the current FY2024, which translates into a yield of 5%.
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Saifee acknowledges that Singtel’s current level of free cash flow (FCF) is lower than investors’ expectations of dividend payout. Nonetheless, with cost-cutting and lower capex, he sees free cash flow to meet dividend expectations by FY2027.
“In the near term, despite FCF to dividend expectation gap, Singtel could pay at the higher end of its payout policy on the back of its balance sheet strength and potential stake divestment in low-yielding assets/associates which in our view should be seen as regular cash flows,” says Saifee.
The value of F&N
Established in Singapore in 1883 and fully acquired by Thai Beverage Y92 (ThaiBev) and TCC Assets in September 2012, F&N is one of the most recognised names in Singapore.
Mainly known for its wide range of beverages on offer, from the isotonic drink 100PLUS to soft drinks under F&N Seasons, mineral water Ice Mountain, as well as soya milk brand F&N NutriSoy, F&N also owns a publishing and printing business, Times Publishing, which it bought over in 2000.
F&N’s Malaysia-listed subsidiary, F&N Holdings Bhd, which was formed in 1996 and listed that same year, also sells a variety of drinks under several brands including 100Plus, F&N canned milk and ready-to-drink tea, F&N Magnolia and Carnation.
As at April 12, F&N Holdings Bhd has a market capitalisation of RM11.47 billion ($3.27 billion), putting F&N’s 55.48% stake at $1.81 billion, above F&N’s own market capitalisation of $1.49 billion on the SGX.
F&N Holdings attracts a significant level of coverage from analysts. Of the seven active coverage on this counter, five of the analysts rate this stock a “buy” or equivalent, while the remaining two rate this stock a “hold”. The most bullish is Huan Wei Gan of Macquarie, who has a target price of RM37.80. In contrast, there is no coverage of F&N here in Singapore.
F&N Holdings reported 1QFY2024 ended December 2023 earnings that beat expectations, thanks to an improvement in demand and margins. In her Feb 2 note, MIDF analyst Genevieve Ng Pei Fen remains upbeat about the company’s prospects, thanks to “robust” improvement in consumption of beverages, with demand further driven by the increase in both leisure and business travellers in Malaysia, and Thailand, which has introduced visa-free arrangements for key markets such as China. With lower materials costs, including sugar, there’s more room for better margins to be made.
The way Ng sees it, the ongoing shift in Malaysian consumer preferences towards local brands, particularly in dairy and food products is a plus, too. With the company’s investment in dairy farming operations, it can gain better control over this key input too. “Moving forward, we anticipate sustained positive revenue momentum in F&B Malaysia and exports,” he adds.
Wilmar and Yihai Kerry
Agri-food giant Wilmar International, for instance, has a market capitalisation of $22.67 billion on the Singapore Exchange S68 (SGX) as at April 12. In comparison, its 89.99%-owned China subsidiary, Yihai Kerry Arawana Holdings, has a market capitalisation of RMB166.23 billion ($31.35 billion) as at the same day, putting Wilmar’s stake in the company at $28.62 billion.
Yihai Kerry Arawana Holdings first traded on the Shenzhen Stock Exchange ChiNext Board on Oct 15, 2020, after raising some 13.93 billion yuan during its IPO. When Wilmar announced that it received the final registration approval for its IPO in China in September 2020, CGS-CIMB (now CGS International) analysts Ivy Ng and Nagulan Ravi said that parent company, Wilmar, offered a cheaper entry and higher liquidity into Yihai Kerry Arawana. At the time, Yihai Kerry Arawana’s free float was at 7% compared to Wilmar’s 30%.
“Stripping out Wilmar’s 90% stake in Yihai Kerry Arawana (post listing) at the IPO price. This suggests that investors are paying only US$1.6 billion for the rest of Wilmar’s assets (ex-Yihai Kerry Arawana), which generated a net profit of US$593 million in 2019, based on our estimates (2019 P/E of three times),” the analysts wrote in their report dated Sept 25, 2020.
“Putting it another way, we estimate the implied P/E for Yihai Kerry Arawana at Wilmar’s current share price to be 17.8 times which is at a 43% discount to the IPO price (values ex-Yihai Kerry Arawana business at 14 times P/E),” they added.
A UOB Kay Hian report by analysts Leow Huey Chuen and Jacquelyn Yow, on Oct 14, 2020, noted that the listing of Yihai Kerry Arawana could serve as a catalyst to Wilmar’s share price.
“Yihai Kerry Arawana’s market value makes up [around] 83.5% of Wilmar’s current value and is a 20% price increase. As such, Yihai Kerry Arawana’s market value could be the same as Wilmar,” wrote Leow and Yow at the time.
Shares in Yihai Kerry Arawana more than doubled on its first day of trading, closing 118% higher at RMB56 per share compared to its IPO price of RMB25.7 each. Thus far, Yihai’s listing has scant impact on Wilmar’s share price, if at all.
Yihai Kerry Arawana does the wholesale and distribution of food products including edible oil, rice, flour, noodles and special grains and oils for the catering industry. Brands under the Chinese company include Arawana, Olivoila, Orchid and Wonder Farm.
Wilmar, which has a manufacturing presence in over 20 countries in Asia and Africa, has businesses spanning food products, products for feed and industrial purposes, shipping and plantation. The group was listed on the mainboard of the SGX on July 20, 2000.
For FY2023 ended Dec 31, 2023, Wilmar reported earnings of US$1.52 billion ($2.07 billion), 36.5% lower y-o-y. Yihai Kerry Arawana’s earnings for FY2023 stood at RMB2.85 billion or $537.6 million. Though 5.4% lower y-o-y, the subsidiary is still the largest profit contributor to Wilmar’s overall bottom line.
