• Paying US$810m for Trustwave
• Long-term positive
• Maintain HOLD with higher S$4.31 FV

Acquiring Trustwave for US$810m

Singtel recently announced that it will be paying US$810m for a 98% equity stake in Trustwave (enterprise value around US$850m), excluding net debt. Trustwave is the largest independently managed security services provider in North America with presence in Europe and Asia Pacific. It has a broad portfolio of services across three main areas – threat management, vulnerability management and compliance management.

Building up its managed security services capabilities

According to Singtel, Trustwave will significantly enhance Singtel’s cyber security capabilities, and establish the telco as a global managed security services provider; this as Singtel sees demand for always-on cyber security managed services to increase significantly. Citing a market research done by Gartner in 2014, the market for such services is likely to grow at a CAGR of 15% to US$24.2b from 2014 to 2018. Although the main market is still likely to be in North America, Singtel is also hopeful that it can bring Trustwave to Asia Pacific and the other emerging markets, thus further strengthening its own enterprise business offerings.

Earnings accretive from third year onwards

Subject to approval by US authorities, the deal is expected to be finalized in the next three to six months. Singtel said it will finance the deal with internal funds, likely via a mixture of cash and debt; we note that Singtel has recently raised about S$300m via the issue of fixed rate notes. On Trustwave itself, Singtel revealed that it expects Trustwave to post revenue of US$216m in 2014 with an EBITDA margin of 6%. However, it expects Trustwave to be earnings accretive from the third year onwards.

Maintain HOLD with higher S$4.31 FV

As such, we do not expect Trustwave to have any immediate impact on earnings but expect the acquisition to be a long-term positive as Singtel moves away from being a pure carrier into a value-added services provider. We also intend to hold off making any adjustments to our estimates ahead of Singtel’s FY15 results due in early May. Nevertheless, our SOTP-based fair value improves from S$4.16 to S$4.31, boosted by the higher share prices of its listed associates. But given the limited near-term upside, maintain HOLD.

Source: OCBC Research - 10 Apr 2015