SingTel - Monetise Optus Tower Assets, Building a Regional Data Centre Presence

Date: 04/10/2021

Source  :  UOB KayHian
Stock  :  SingTel       Price Target  :  2.75      |      Price Call  :  BUY
        Last Price  :  2.58      |      Upside/Downside  :  +0.17 (6.59%)

  • Optus is divesting a 70% stake in its tower assets for A$1.9b. This values the assets at 38x EV/EBITDA as Optus losses controlling stake in the infraco. The proceeds will be ‘recycled’ back into Singapore and Australia’s 5G infrastructure and other growth opportunities.
  • Separately, SingTel announced the creation of a regional data centre business with Gulf Energy and Telkom Indonesia. The data centre may be worth S$7-8b in 5 years’ time.
  • Maintain BUY rating on SingTel with DCF-based target price of S$2.75.

Optus Announced Monetisation of Optus Tower Asset for A$1.9b a Fair Valuation of 38x EV/EBITDA Given the Loss of Control

  • Optus announced that it is selling a 70% stake in Australia Tower Network (ATN) - a wholly-owned subsidiary that houses Optus’ towers - to AustralianSuper for A$1.9b. The transaction involves 2,312 of Optus mobile towers with a tenancy ratio of 1.6x. Optus will continue to have access to the towers through a 20-year lease agreement with ATN. Optus is also committed to build a minimum of 565 sites over the next three years as part of its integral 5G network planning.
  • The stake sale values ATN at 38x FY21 EV/EBITDA, or EV/sites of ~A$1m/tower. The valuation appears to be a premium vis-à-vis Telstra’s recent tower sales and appealing vs traditional telco multiples of 8-12x EV/EBITDA. We note that the premium is reflective of the loss of control by Optus (who will retain only a 30% minority stake in ATN). The deal is expected to complete by end-Oct 21 and SingTel would record an estimated net investment gain of S$0.4m.

Capital Recycling to Fund Future Growth

  • The divestment is in line with SingTel’s strategy to reallocate capital to drive core business growth and generate sustainable cash flow to enhance shareholders’ value. The net proceeds of A$1.9b will be utilised to:
    1. support 5G rollout in Singapore and Australia,
    2. expand its B2B digital business via NCS, and
    3. strengthen its balance sheet to pay sustainable dividends.
  • We project a dividend yield of 4- 5% from SingTel for FY22-24, based on a dividend payout of 70%.

SingTel to Create a Green Regional Data Centre With Potential S$8b Valuation Within Five Years

  • To capitalise on accelerating data on management’s guidance of S$10m/MW CAPEX requirement.

Positive Monetisation Exercise by Singtel

  • We are positive on the above monetisation exercise to drive future help SingTel bridge the current market valuation gap as a conglomerate.

The End Game: a Regional Digital Infra Player

  • Beyond unlocking value, the regional digital infrastructure platform across multiple asset classes.

Singtel - Earnings Revision & Risk

  • Earnings revision: none.
  • Key risks include heightened regulatory risk across the region, especially India as its 31.7%-owned-associate Airtel was recently slapped with an Rp10.5b (S$192m) penalty for allegedly denying inter-connectivity to Reliance Jio in 2016, which affected quality of service.

Singtel - Valuation & Recommendation

  • Maintain BUY with a 13x FY22F EV/EBITDA (5-year mean EV/EBITDA).
  • SingTel's share price currently trades at 1 standard deviation below its 5-year mean EV/EBITDA of 13x.
  • Key re-rating catalysts include:
    1. successful monetisation of 5G,
    2. faster-than-expected recovery in Optus' consumer and enterprise businesses, and
    3. market repair in Singapore.

Source: UOB Kay Hian Research - 4 Oct 2021

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