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Author: simonsg   |   Latest post: Fri, 6 Dec 2019, 10:19 AM

 

SingTel - Bharti’s Woes Might be Reduced With Government Intervention

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  • Bharti may have to pay out ~US$6bn (according to news article), which is ~20% of its market cap.
  • As Bharti comprises ~22% of our valuation for SingTel, this may have an adverse theoretical impact of ~4% on SingTel’s market cap.
  • The payout is more than the market cap of Vodafone-Idea Limited (VIL); Indian Government may intervene to reduce the burden.
  • Maintain HOLD on SingTel (SGX:Z74) with unchanged Target Price of S$3.12.

What’s New

  • In India, the Supreme Court has announced its verdict and has rejected telecom operators’ definition of Adjusted Gross Revenue (AGR), putting an end to the 14-year old legal tussle. (See article, article).
  • According to a news article, total outstanding payout for Bharti stands at Rs446bn (~US$6bn), and Vodafone-Idea Limited (VIL) at Rs393bn (~US$5.5bn). However, these companies have yet to disclose the exact penalty and have asked for six months' grace to calculate their dues.

Our View

  • Assuming ~US$6bn payout as per indicated in the news article, the payout is close to 20% of Bharti’s market cap. Since Bharti comprises ~22% of SingTel’s valuation, this may have an adverse theoretical impact of ~4% on SingTel’s market cap.
  • However, Bharti’s stock price strengthened 3% yesterday compared to Vodafone-Idea’s stock price dropping 23%. This can be explained by the fact that Vodafone-Idea, with FY21F net debt to EBITDA of 9.5x, versus Bharti’s 3.4x may struggle to pay the amount due of US$5.5bn and potentially seek an exit. Vodafone-Idea’s market cap (below US$2bn) is far below its payout.
  • We think that Indian government may intervene to reduce the payout in order to avoid an exit scenario possibility, or provide some relief in the form of an extended timeline for payment, waiving certain penalty/interest charges or staggered payment. However, even a smaller payout (say US$1bn) may be too burdensome for Vodafone-Idea, benefiting Bharti and Reliance Jio as key players in a duopoly market structure.
  • We maintain HOLD on SingTel (SGX:Z74) with unchanged Target Price of S$3.12. SingTel’s FY20F/21F consensus earnings could be cut 10%/8% due to delay in Bharti’s profitability, meagre growth from Telkomsel and weak Australian Dolla.

Source: DBS Research - 25 Oct 2019

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